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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended September 30, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _______________ to _______________
Commission File Number 001-15401
EDGEWELL PERSONAL CARE COMPANY
(Exact name of registrant as specified in its charter)
| Missouri | 43-1863181 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) | |||||||||||||
| 6 Research Drive | (203) | 944-5500 | ||||||||||||
| Shelton, | CT | 06484 | (Registrant’s telephone number, including area code) | |||||||||||
| (Address of principal executive offices and zip code) | ||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Stock symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.01 per share | EPC | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2020, the last day of the registrant’s most recently completed second fiscal quarter, was $1,308,110,602.
The number of shares of the registrant’s common stock outstanding as of October 31, 2020 was 54,355,183.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement for its 2021 annual meeting of shareholders, to be filed with the Securities and Exchange Commission within 120 days after September 30, 2020, are incorporated by reference into Part III of this report.
EDGEWELL PERSONAL CARE COMPANY
INDEX TO FORM 10-K
| PART I | ||||||||
| Item 1. | Business. | |||||||
| Item 1A. | Risk Factors. | |||||||
| Item 1B. | Unresolved Staff Comments. | |||||||
| Item 2. | Properties. | |||||||
| Item 3. | Legal Proceedings. | |||||||
| Item 4. | Mine Safety Disclosures. | |||||||
| PART II | ||||||||
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
|||||||
| Item 6. | Selected Financial Data. | |||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. | |||||||
| Item 8. | Financial Statements and Supplementary Data. | |||||||
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. | |||||||
| Item 9A. | Controls and Procedures. | |||||||
| Item 9B. | Other Information. | |||||||
| PART III | ||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance. | |||||||
| Item 11. | Executive Compensation. | |||||||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
|||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. | |||||||
| Item 14. | Principal Accounting Fees and Services. | |||||||
| Part IV | ||||||||
| Item 15. | Exhibits, Financial Statement Schedules. | |||||||
| Signatures | ||||||||
| Exhibit Index | ||||||||
Presentation of Information
Unless the context requires otherwise, references to “Edgewell Personal Care Company,” “Edgewell,” “we,” “us,” “our” and “the Company” refer to Edgewell Personal Care Company, and its consolidated subsidiaries.
Trademarks and Trade Names
We own or have rights to use trademarks and trade names that we use in conjunction with the operation of our business, which appear throughout this Annual Report on Form 10-K. Solely for convenience, we only use the ™ or ® symbols the first time any trademark or trade name is mentioned. We may also refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.
Industry and Market Data
Unless we indicate otherwise, we base the information concerning our industry contained or incorporated by reference herein on our general knowledge of and expectations concerning the industry. Our market position, market share and industry market size are based on our estimates using internal data and data from various industry analyses, our internal research and adjustments and assumptions that we believe to be reasonable. We have not independently verified data from industry analyses and cannot guarantee its accuracy or completeness. In addition, we believe that data regarding the industry, market size and our market position and market share within such industry provide general guidance but are inherently imprecise. Further, our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section of this document. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions.
Retail sales for purposes of market size, market position and market share information are based on retail sales in United States dollars.
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Edgewell Personal Care Company or any of our businesses. Forward-looking statements generally can be identified by the use of words or phrases such as “believe,” “expect,” “expectation,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “target,” “predict,” “likely,” “will,” “should,” “forecast,” “outlook,” or other similar words or phrases. These statements are not based on historical facts, but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, the future earnings and performance of Edgewell Personal Care Company or any of our businesses. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. You should not place undue reliance on these statements. Factors that could cause fluctuations in our actual results include, but are not limited to, the following:
•the ongoing novel coronavirus 2019 (COVID-19) pandemic;
•our ability to compete in products and prices in an intensely competitive industry;
•the loss of any of our principal customers;
•our inability to execute a successful e-commerce strategy;
•fluctuations in the price and supply of raw materials;
•our failure to maintain our brands’ reputation;
•our failure to achieve projected gross cost savings under our various initiatives, including Project Fuel;
•legislative or regulatory changes impacting or limiting our business; and
•product quality and safety issues, including recalls and product liability.
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In addition, other risks and uncertainties not presently known to us or that we presently consider immaterial could significantly affect the forward-looking statements. The list of factors above is illustrative, but not exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Additional risks and uncertainties include those detailed from time to time in our publicly filed documents, including in Item 1A. Risk Factors of Part I of this Annual Report on Form 10-K.
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PART I
Item 1. Business.
Overview
Edgewell Personal Care Company, and its subsidiaries, is one of the world’s largest manufacturers and marketers of personal care products in the wet shave, sun and skin care, and feminine care categories. We operate in more than 20 countries and have a global footprint in more than 50 countries.
History and Development
We were incorporated in the state of Missouri on September 23, 1999 and, prior to April 2000, were a wholly-owned subsidiary of Ralston Purina Company. On April 1, 2000, all of the outstanding shares of our common stock were distributed to shareholders of Ralston Purina Company and we became an independent publicly-owned company. During the years that followed, we implemented a strategy of acquiring several personal care brands, which created the foundation for the company we are today.
In 2003, we completed the acquisition of the Schick-Wilkinson Sword business (“SWS”) from Pfizer, Inc., which was the second largest manufacturer and marketer of men’s and women’s wet shave products in the world. Our portfolio of wet shave products includes: Hydro® and Quattro® men’s shaving systems; Hydro Silk®, Quattro for Women®, Intuition® and Silk Effects® Plus women’s shaving systems; and the Hydro, Quattro, Xtreme 3®, Slim Twin®, Slim Triple® and Extra3® disposables. SWS has over 100 years of history in the shaving products industry with a reputation for high quality and innovation in shaving technology. SWS products are sold throughout the world.
In 2007, we acquired Playtex Products, Inc. (“Playtex”), a leading manufacturer and marketer of well-recognized brands such as Playtex® feminine care products, Wet Ones® pre-moistened wipes, and Banana Boat® and Hawaiian Tropic® sun care products, thereby expanding our branded consumer products portfolio.
In 2009, we completed the acquisition of the Edge® and Skintimate® shave preparation brands from S.C. Johnson & Son, Inc., adding United States (“U.S.”) market leading shave preparation brands to our existing wet shave product portfolio. In 2010, we completed the acquisition of American Safety Razor, LLC (“ASR”), a leading global manufacturer of private label and value wet shaving razors and blades and specialty blades. ASR was founded in 1875.
Strengthening our company’s feminine care product portfolio, in 2013 we acquired the Stayfree® pad, Carefree® liner and o.b.® tampon feminine hygiene brands in the U.S., Canada and the Caribbean from Johnson & Johnson.
In 2015, we completed the separation of our Household Products business, which manufactures and markets batteries and portable lighting, into a separate publicly-traded company (the “Spin” or the “Separation”). We completed the tax-free Separation by distributing 100% of the outstanding shares of common stock of Energizer SpinCo, Inc. to our shareholders. The newly formed company assumed the name Energizer Holdings, Inc. (“New Energizer”) and began trading under the symbol “ENR” on the New York Stock Exchange (“NYSE”). Edgewell retained the Personal Care business and trades on the NYSE under the symbol “EPC.” Following the Separation, we do not beneficially own any shares of New Energizer. In connection with the Separation, we changed our name to Edgewell Personal Care Company on June 30, 2015.
In recent years, we entered the men’s grooming and skin care markets through several acquisitions. On October 31, 2016, we completed the acquisition of Bulldog Skincare Holdings Limited (“Bulldog”), a men’s grooming and skincare products company based in the United Kingdom (the “U.K.”). On March 1, 2018, we completed the acquisition of Jack Black, L.L.C. (“Jack Black”), a men’s luxury skincare products company based in the U.S. On December 17, 2019, we completed the sale of our Infant and Pet Care business, allowing us to re-shape and simplify our brand portfolio while shifting to a consumer and brand-led focus. Finally, on September 2, 2020, we completed the acquisition of Cremo Holding Company, LLC (“Cremo”), one of the strongest and fastest growing masstige brands in men’s grooming, offering a complete line of beard, hair, shave prep and skin care products. These acquisitions have created opportunities to expand our personal care portfolio into a growing global category and have allowed us to leverage our international geographic footprint.
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Our Business Segments and Product Strategies
We manage our business in three operating segments: Wet Shave, Sun and Skin Care, and Feminine Care. The Company previously had an All Other segment that consisted primarily of infant and pet care products that was sold in December 2019. Segment performance is evaluated based on segment profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with restructuring initiatives and other items that are not representative of management’s view on how segment performance is evaluated. Information regarding the product portfolios of these segments is included within the following discussion. Financial information regarding each of our reportable segments, as well as other geographical information, is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 18 of Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Wet Shave
Wet Shave products are sold under the Schick®, Wilkinson Sword®, Edge, Skintimate, Shave Guard® and Personna® brand names. We manufacture and distribute Schick and Wilkinson Sword razor systems, composed of razor handles and refillable blades, and disposable shave products for men and women. While we market our wet shave products throughout the world, our primary markets are the U.S., Canada, Japan, Germany, France and the U.K. We believe we hold the number two global market share position in wet shaving. The category is highly competitive, with manufacturers vying for consumer loyalty and retail shelf space.
We have gained recognition for our innovation designed to improve the shaving experience, including the introduction of our Schick Hydro men’s shaving system in 2010.
During 2017, we launched our first direct-to-consumer site in the U.S., and see continued growth across direct-to-consumer platforms across markets in North America, Europe, and Asia. Additionally, during 2017, we launched our Schick Quattro YOU™ disposables for women in North America, which have a unique SmoothProtect™ four-blade design to protect skin and a slimmer handle for greater control.
In 2018, we introduced Intuition f.a.b.™ for women which has five bi-directional blades that shave up and down. We intend to continue to develop and expand across our Wet Shave brands, including Hydro, Quattro, Intuition and Xtreme 3.
In the U.S., Canada and Japan, we also sell market-leading shave preparation products, including shaving gels and creams under the Edge, Skintimate and Shave Guard brands.
We also manufacture, distribute and sell a complete line of private label and value-priced wet shaving disposable razors, shaving systems and replacement blades. These wet shave products are sold primarily under a retailer’s store name or under our value brand names such as Personna.
Sun and Skin Care
Sun and Skin Care products are sold under the Banana Boat, Hawaiian Tropic, Bulldog®, Jack Black®, Cremo® and Wet Ones brand names. We market Sun Care products under the Banana Boat and Hawaiian Tropic brands and believe these brands, on a combined basis, hold a leading market share position in the U.S. sun care category. We compete across the full spectrum of Sun Care categories: general protection, sport, kids, baby, tanning and after sun. Outside the U.S., we believe we are also the leading Sun Care manufacturer in Australia and Mexico. We expect to continue to drive our worldwide business through innovation, increased distribution and geographic expansion.
Our Bulldog skincare products are purpose-built for men and were created to work simply and efficiently while dealing with issues specific to men’s skin. Since acquiring the brand in October 2016, we have expanded sales geographically and are committed to further growth and distribution for the brand. We acquired the Jack Black brand in March 2018 to obtain a footprint in the luxury men’s skincare market. We will use resources at our disposal to grow the Jack Black brand globally. We continued to grow our portfolio of men’s skincare and grooming brands with the acquisition of Cremo in September 2020. We also offer Wet Ones, the leader in the U.S. portable hand wipes category.
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Feminine Care
In Feminine Care, we market products under the Playtex, Stayfree, Carefree and o.b. brands. We offer tampons under the Playtex Gentle Glide® 360°™, Playtex Sport®, Playtex and o.b. brands, including the Playtex Sport compact tampon launched in 2017. We also market pads and liners under the Stayfree and Carefree brands. We believe we are one of the top three manufacturers of feminine care products in North America, with unique, competitive product technologies and well-known brands that address complementary consumer needs. We intend to continue to invest in innovation in our feminine care brands.
Competition
The personal care product categories are highly competitive, both in the U.S. and on a global basis, as large manufacturers with global operations and new entrants attempting to disrupt the market compete for consumer acceptance and, increasingly, limited retail shelf space. The continued growth in online sales also puts additional competitive pressure on our Company. Competition is based upon several factors, including brand perception, product performance, customer service and price and promotion.
The global shaving products category is comprised of wet shave blades and razors, electric shavers and shaving gels and creams. With our established product lines and global presence, we believe we compete effectively in this market. Our principal competitors in the global wet shave business are: The Procter & Gamble Company, which owns the Gillette brand and is the leading company in the global wet shave segment; Bic Group, which is expanding beyond its historical strength in the disposable segment; and Dorco, which competes primarily in the private label segment. We also compete with newer entrants to the Wet Shave market for both direct-to-consumer online and traditional retail shelf space including Unilever (Dollar Shave Club brand), Harry's, Perio (Barbasol and PureSilk brands), Beiersdorf (Nivea branded women’s wet shave product in Germany) and numerous online start-ups.
The markets for sun and skin care, feminine care and other personal care products are also highly competitive, characterized by frequent introduction of new products, accompanied by major advertising and promotional programs. Our competitors in these markets consist of a large number of domestic and foreign companies, including The Procter & Gamble Company and Kimberly-Clark Corp. in feminine care and Bayer AG and Johnson & Johnson in sun and skin care.
The market for sun care products is also characterized by global growth and is impacted by trends in skin care. With our balanced sun care portfolio, depth of sun care expertise and global presence, we believe we compete effectively and have more than doubled our international sun care business since acquiring the Banana Boat and Hawaiian Tropic brands in 2008. We intend to continue to compete by driving innovation, building differentiated equity and focusing on in-store visibility.
The global men’s skin care market is expected to continue to grow, with increased demand for men’s personal care products. Our competitors in this market include large companies such as Johnson & Johnson, L’Oréal S.A., The Estee Lauder Companies, Inc. and Unilever, as well as smaller companies. We compete in the market by creating simple and effective skin care products with natural ingredients at multiple price points through our Bulldog and Cremo skin care products and in the luxury men’s skin care market with Jack Black.
With our fiscal 2014 acquisition of the Stayfree, Carefree and o.b. brands, we expanded our presence within the feminine care product category and became one of the top three manufacturers in North America. We compete by having a portfolio of well-known brands that address complementary consumer needs.
Sales and Distribution
Our products are marketed primarily through a direct sales force, but also through exclusive and non-exclusive distributors and wholesalers. In the U.S., Japan and the larger countries of Western Europe and Latin America, we have dedicated commercial organizations, reflecting the scale and importance of these businesses. In several countries, where we do not have dedicated commercial organizations, we utilize third-party distributors and wholesalers. As a result of increased competition through the expansion of online markets, we have established e-commerce operations across several lines of business including global Schick.com websites providing men’s and women’s shaving products, Bulldog direct to consumer sites, Jack Black direct to consumer sites, and acceleration of e-commerce sales in China through our partnership with T-Mall. We distribute our products to consumers through numerous retail locations worldwide, including mass merchandisers and warehouse clubs, food, drug and convenience stores, and military stores.
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Although a large percentage of our sales are attributable to a relatively small number of retail customers, only Walmart Inc. and its subsidiaries (“Walmart”), as a group, account for more than 10% of our consolidated annual net sales. Walmart accounted for approximately 22% of our net sales from continuing operations in fiscal 2020. Purchases by Walmart included products from all of our segments. Target Corporation represented approximately 10% of net sales for each of our Sun and Skin Care and Feminine Care segments, respectively.
Generally, orders are shipped within a month of their order date. Because of the short period of time between order and shipment dates, the dollar amount of current backlog is not material and is not considered to be a reliable indicator of future sales volume.
Government contracts do not represent a material portion of our net sales.
Seasonality
Customer orders for sun care products within our Sun and Skin Care segment are highly seasonal, which has historically resulted in higher sun care sales to retailers during the late winter through mid-summer months. Within our Wet Shave segment, sales of women’s products are moderately seasonal, with increased consumer demand in the spring and summer months. See “Our business is subject to seasonal volatility” in Item 1A. Risk Factors.
Sources and Availability of Raw Materials
The principal raw materials used in our products include steel, various plastic resins, plastic based components, textile fibers and non-woven fabrics, organic and inorganic chemicals, soap based lubricants and plastic-pulp based packaging. These materials are sourced on a regional or global basis, as applicable, and are generally available from multiple sources. Price and availability of our raw materials fluctuate over time. While we have confidence our supply assurance plans adequately support our current operational needs, we cannot predict the future with certainty. Both price and supply are subject to risk from global socio- and macroeconomic influences such as, but not limited to, force majeure, loss or impairment to key manufacturing sites, transportation, government regulation, currency or other unforeseen circumstances. In the past, we have avoided significant interruption in the availability of our input materials and believe our extensive experience in procurement allows us to manage these risks effectively.
Patents, Technology and Trademarks
We own a number of U.S. and international trademarks, which we consider of substantial importance and which are used individually or in conjunction with our other trademarks. These include, but are not limited to: Edgewell®, Schick, Schick Hydro, Schick Hydro Silk, Hydro Connect, Wilkinson Sword, Intuition, Quattro, Xtreme 3, Protector, Silk Effects, Slim Twin, Edge, Skintimate, Personna, Banana Boat, Hawaiian Tropic, Bulldog, Jack Black, Cremo, Gentle Glide, Sport, Sport Level Protection®, Wet Ones, Stayfree, Carefree and o.b. As a result of the Playtex acquisition, we also own royalty-free licenses in perpetuity to the Playtex trademark in the U.S. and in many international jurisdictions related to certain feminine hygiene and other products but excluding certain baby care and apparel-related products. We consider the protection of our trademarks to be important to our business.
Our ability to compete effectively in the Wet Shave, Sun and Skin Care, and Feminine Care personal care categories depends, in part, on our ability to maintain the proprietary nature of technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements and licensing agreements. We own or license a considerable number of patents, patent applications and other technology from third parties, which we believe are important to our business. These relate primarily to shaving product improvements and additional features, feminine care hygiene products including digital and applicator tampons, pads and liners, sunscreen formulations and manufacturing processes.
As of September 30, 2020, we owned, either directly or beneficially, approximately 473 unexpired U.S. patents, which have a range of expiration dates from October 2020 to August 2038, and we had approximately 51 pending U.S. patent applications. We routinely prepare additional patent applications for filing in the U.S. and actively pursue foreign patent protection in various countries. As of September 30, 2020, we owned, either directly or beneficially, approximately 1,309 foreign patents, having a range of expiration dates from October 2020 to November 2043, and we had approximately 98 pending patent applications in foreign countries.
We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others.
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Governmental Regulation and Environmental Matters
We are subject to various federal, state, foreign and local laws and regulations by governmental agencies intended to protect the public health and environment, including those governing the manufacture, use, discharge and disposal of hazardous materials, labeling and notice requirements related to consumer exposure to certain chemicals, and requirements for the recycling of our products and their packaging. These agencies include, but are not limited to (i) the U.S. Food and Drug Administration and equivalent international agencies that regulate ingredients in consumer products, (ii) the U.S. Environmental Protection Agency (“EPA”) and equivalent international agencies that regulate our manufacturing facilities, and (iii) the Chemical Registration/Notification authorities that regulate chemicals that we use in, or transport to, the various countries in which we manufacture and/or market our products. We have seen an increase in registration and reporting requirements concerning the use of certain chemicals in a number of countries, such as the Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”) regulations in the European Union (the “E.U.”).
Contamination has been identified at certain of our current and former facilities, as well as third-party waste disposal sites, and we are conducting investigation and remediation activities in relation to such properties. In connection with certain sites, we have received notices from the EPA, state agencies and private parties seeking contribution, that we have been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) and, as a result, we may be required to share in the cost of cleanup with respect to a number of federal “Superfund” sites. In addition to potential costs to clean up our own properties, we may also be required to share in the cost of cleanup with respect to state-designated sites and certain international locations.
The amount of our ultimate liability in connection with those sites may depend on many factors, including the volume and toxicity of material contributed to the site, the number of other PRPs and their financial viability, and the remediation methods and technology to be used. Total environmental capital expenditures and operating expenses are not expected to have a material adverse effect on our total capital and operating expenditures, cash flows, earnings or competitive position. Current environmental spending estimates could be modified as a result of changes in our plans or our understanding of the underlying facts, changes in legal requirements, including any requirements related to global climate change, or other factors.
Many European countries, as well as the E.U, have been very active in adopting and enforcing environmental regulations. As such, it is possible that new regulations may increase the risk and expense of doing business in such countries.
The U.S. Toxic Substances Control Act (“TSCA”) and similar laws in other jurisdictions, are intended to ensure that chemicals do not pose unreasonable risks to human health or the environment. TSCA requires the EPA to maintain the TSCA registry listing chemicals manufactured or processed in the United States. Chemicals not listed on the TSCA registry cannot be imported into or sold in the U.S. until registered with the EPA. TSCA also sets forth specific reporting, recordkeeping and testing rules for chemicals, including requirements for the import and export of certain chemicals, as well as other restrictions relevant to our business. Pursuant to these laws, the EPA from time to time issues Significant New Use Rules, or SNURs, when it identifies new uses of chemicals that could pose risks to human health or the environment and also requires pre-manufacture notification of new chemical substances that do not appear on the TSCA registry. When we import chemicals into the U.S., we must ensure that chemicals appear on the TSCA registry prior to import, participate in the SNUR process when a chemical we import requires testing data and report to the EPA information relating to quantities, identities and uses of imported chemicals.
In the E.U., our business is affected by legislation dealing with REACH, which requires manufacturers and importers of chemical substances to register such substances with the European Chemicals Agency, or the ECHA, and enables European and national authorities to track such substances. Depending on the amount of chemical substances to be manufactured or imported, and the specific risks of each substance, REACH requires different sets of data to be included in the registration submitted to the ECHA. Registration of substances with the ECHA imposes significant recordkeeping requirements that can result in significant financial obligations for companies such as ours to import products into Europe. REACH is accompanied by legislation regulating the classification, labeling and packaging of chemical substances and mixtures.
We believe that our facilities and products are in substantial compliance with current laws and regulations.
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Human Capital
Employee Profile
At Edgewell, we are committed first and foremost to people: our employees, the consumers who use our products, the suppliers and retailers who partner with us, and the communities in which we operate. As of September 30, 2020, we had approximately 5,800 employees, with approximately 2,200 based in the U.S, and certain of our employees represented by unions or works councils. We have cultivated a culture that is centered around our guiding purpose of Making Useful Things Joyful. This purpose is supported by a set of values and behaviors that guide organizational actions and decisions, such as a focus on diversity, equity and inclusion through our sustainability program.
Employee Wellness
Our foundational values of “People first,” “Move forward,” “Listen up and speak up” and “Own it together” support a culture of celebration, agility, authenticity and collaboration. This culture promotes trust and teamwork, which results in bold and aggressive goals, smart risks and an environment where innovation and ideation thrives.
The COVID-19 pandemic presented an opportunity to demonstrate our “People first” value. For example, as of September 30, 2020, we provided pandemic pay to 62% of our US plant teams to cover lost wages due to taking time off for childcare or to self-quarantine, or for team members with underlying conditions.
The wellness of our people remains a primary focus and we believe that the most productive people are those who are at their best, both physically and mentally. Our employees have access to several programs related to employee wellness including: onsite wellness testing and education; mental and emotional health awareness and support; and work-life balance through flex-time, remote working arrangements and parental leave, among others.
Ensuring a positive, purposeful working experience for our employees that is reflective of our purpose and values is central to our business operations. We continually monitor employee retention rates and we believe our progressive human resources policies, learning and development, talent acquisition, workplace health and safety, and community engagement and support activities enable us to attract and retain key personnel.
Employee Hiring Practices
We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports the global workforce, consumers and the communities we serve. We recruit the best people for the job regardless of gender, ethnicity or other protected traits and it is our policy to comply fully with all domestic, foreign and local laws relating to discrimination in the workplace. Our diversity, equity and inclusion principles are also reflected in our employee training, and in particular with respect to our policies against harassment and bullying and the elimination of bias in the workplace. We continue to enhance our diversity, equity and inclusion policies which are guided by our executive leadership team.
Employee Recognition and Talent Development
Our response to the COVID-19 pandemic along with other transformational changes we’ve made to prepare our business and employees for the future helped drive improved and positive employee engagement scores. We understand that to attract and retain great people, we must listen to and engage them regularly. Each year, we conduct an anonymous employee engagement survey to gauge our progress and identify the areas where we excel and areas for improvement in the employee experience. For the survey conducted in Summer 2020, our overall positivity score was 74% with over 4,100 employees interacting with the survey. Our overall positivity score increased by eight percentage points from the Summer 2019 survey.
In response to the feedback that we received during the Summer 2019 survey, we took steps to expand our peer-to-peer recognition programs and rolled out a robust new learning and career development program. In fiscal 2020, we began the process of revamping our employee performance management program through the implementation of a “continuous performance” process. The new process, which will be implemented in stages over the next two fiscal years, will align individual employee goals with our overall organizational goals while engaging in continuous feedback throughout the fiscal year to ensure that specific team and individual collaboration and accountabilities continue to be linked with each goal. We believe the feedback gathered will help inform employees on how well they are demonstrating our values – the ‘how’ piece of performance – and help to identify any development opportunities and/or progress.
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Also, in July 2020, we launched our new Spark Growth program for every People Manager across our company – a total of nearly 900 employees. The program will better equip our People Managers to develop employees, engage in career discussions, and maximize employee performance and potential. This will not only support the learning and growth of People Managers, but also ensure that our leaders are effective in enabling our employees to do their best work.
Executive Officers
Set forth below are the names and ages as of September 30, 2020, and current positions of our executive officers.
| Name | Age | Title | ||||||
| Rod R. Little | 51 | Chief Executive Officer | ||||||
| Daniel J. Sullivan | 51 | Chief Financial Officer | ||||||
| Anne Sophie Gaget | 50 | Chief Growth and Innovation Officer | ||||||
| Paul R. Hibbert | 51 | Chief Supply Chain Officer | ||||||
| John N. Hill | 57 | Chief Human Resources Officer | ||||||
| Colin A. Hutchison | 62 | Chief Operating Officer | ||||||
| Marisa B. Iasenza | 51 | Chief Legal Officer and Corporate Secretary | ||||||
| Eric O’Toole | 53 | President, North America | ||||||
| Nick Powell | 53 | President, International | ||||||
Set forth below is a brief description of the position and business experience of each of our executive officers.
Rod R. Little has served as Chief Executive Officer since March 1, 2019. Mr. Little previously served as our Chief Financial Officer beginning in March 2018. Prior to joining Edgewell, Mr. Little served as Chief Financial Officer of HSNi from January 2017 to December 2017, and as Executive Vice President and Chief Financial Officer of Elizabeth Arden, Inc. from April 2014 to November 2016. Prior to joining Elizabeth Arden, Mr. Little spent 17 years with Procter & Gamble where he held numerous positions of increasing responsibility in Procter & Gamble’s divisional and corporate finance organization, ultimately serving as the chief finance officer of their global salon professional division from 2009 until 2014. Mr. Little also served for five years in the United States Air Force prior to joining Procter & Gamble in 1997.
Daniel J. Sullivan has served as Chief Financial Officer since April 1, 2019. Prior to joining Edgewell, Mr. Sullivan served as Executive Vice President and Chief Financial Officer of Party City Holdco Inc. Previously, Mr. Sullivan spent six years, from 2010 to 2016, with Ahold USA Inc., where he held positions of increasing responsibility within their control and finance divisions, ultimately serving as Executive Vice President and Chief Financial Officer from 2013 to 2016. Prior to that, Mr. Sullivan spent 13 years at Heineken N.V, most recently as the Chief Financial and Operating Officer of Heineken USA. Mr. Sullivan is a certified public accountant.
Anne Sophie Gaget has served as Chief Growth and Innovation Officer since June 1, 2020. Prior to her current role, Ms. Gaget was Vice President Global Strategy & Innovation from 2018 through May 2020 and served as Vice President Global Commercial Strategy and Regional Vice President of France, South Europe, Middle East & Africa for Edgewell from 2015 through 2018. Prior to Edgewell, Ms. Gaget held a number of leadership positions spanning 12 years with Energizer Holdings, including Regional Business Director, Southern Europe and General Manager, France.
Paul R. Hibbert has served as Chief Supply Chain Officer since June 1, 2020. Prior to his current role, Mr. Hibbert was Vice President Global Supply Chain & Operations from February 2018 through May 2020. Before joining Edgewell in 2018, Mr. Hibbert served as the Executive Vice President of Supply Chain for Safety-Kleen Systems, Inc. from 2015 through 2018, and he held various roles of increasing responsibility such as Senior Vice President Supply Chain at Central Garden and Pet Company, Supply Chain Consultant at Chemtura BioLab, Inc., and Supply Chain Vice President Home and Garden Division at Spectrum Brands, Inc.
John N. Hill has served as Chief Human Resources Officer since April 4, 2017. Mr. Hill had previously led the North America commercial organization as our company’s Vice President, North America since July 1, 2015, and as the VP, North America Commercial of Energizer’s Personal Care division from 2007 to 2015. Mr. Hill joined our company in 2003 as General Manager Schick Canada following the acquisition of Schick-Wilkinson Sword from Pfizer, Inc.
Colin A. Hutchison has served as Chief Operating Officer since April 4, 2017. Mr. Hutchison had previously served as Vice President Commercial, International since July 1, 2015. From January 2011 to July 1, 2015, Mr. Hutchison served as Vice President and General Manager of our Private Brands Group, and prior to that as Vice President for Schick-Wilkinson Sword and Personal Care in Europe since joining our company in 2004. As previously announced in a press release filed under Form 8-K with the SEC on June 2, 2020, Mr. Hutchison will be retiring from his role as our Chief Operating Officer effective November 15, 2020.
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Marisa B. Iasenza has served as Chief Legal Officer and Corporate Secretary since June 4, 2018. From 2008 to 2018, Ms. Iasenza served in roles of increasing responsibility at Harman International Industries, Incorporated, most recently as Senior Vice President, General Counsel & Secretary. Prior to joining Harman, Ms. Iasenza served as Assistant General Counsel at UAP Holdings, Inc. from 2007-2008, and prior thereto she worked in private practice in Southern California.
Eric O’Toole has served as President, North America since May 26, 2020. Prior to joining Edgewell, Mr. O’Toole was General Manager of Walmart’s Sporting Goods e-commerce division. Mr. O’Toole had joined e-commerce startup Jet.com in early 2016 prior to Jet.com’s acquisition by Walmart. Earlier in his career, he held various positions at the Groupe Danone from 2003 to 2016 including President Danone Waters of America, SVP Sales and VP Business Development, The Dannon Company.
Nick Powell has served as President, International since June 1, 2020. Mr. Powell had previously served as VP Europe and Latin America from April 2018 through May 2020; VP Europe, Middle East and Africa from 2017 through 2018; and VP North Europe from 2015 to 2017. Prior to this experience, he was also Area Business Director and Managing Director for Energizer Holdings and Schick Wilkinson Sword.
Available Information
Our website address is www.edgewell.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this filing. We make available to the public on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (“SEC”).
Item 1A. Risk Factors.
The following risks and uncertainties could materially adversely affect our business, results of operations, financial condition and cash flows. We may amend or supplement the risk factors described below from time to time in other reports we file with the SEC.
Risks Related to Our Business
The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events on our business, operating results and cash flows are uncertain and could be material.
Our business and financial results may be negatively impacted by health epidemics, pandemics and similar outbreaks. Novel Coronavirus 2019 (“COVID-19”), and the global requirements to take action to help limit the spread of the illness, have and will likely continue to impact our ability to carry out our business as usual and may materially adversely impact our business, results of operations, cash flows and financial condition and global economic conditions. Even in those regions where we are currently experiencing limited business recovery, should those regions fail to fully contain COVID-19 or suffer a recurrence of an outbreak of COVID-19, our businesses located in those regions may not recover as quickly or at all, which could have a material adverse effect on our business and results of operations, including causing:
•significant volatility in demand for our products;
•changes in consumer shopping behavior and preference;
•disruptions in our manufacturing and supply chain operations;
•disruptions to our cost saving programs and restructuring initiatives;
•limitations on our employees’ ability to work and travel;
•significant changes in the economic or political conditions in markets in which we operate; and
•related currency and commodity volatility.
We cannot predict the degree to, or the time period over, which our sales and operations may be affected by this outbreak and related preventative measures, and the effects could be material.
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Consumer spending patterns are difficult to predict and are sensitive to the general economic climate, the consumer’s level of income, consumer debt, and overall consumer confidence. In the recent past, financial crises have impacted and may continue to impact our business in a number of ways. Included among these current and potential future negative impacts are reduced demand and lower prices for our products and services. In challenging and uncertain economic environments, including the COVID-19 pandemic, we cannot predict when uncertainty surrounding macroeconomic conditions may arise and whether such circumstances could impact our Company.
Competition in our industries may hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers.
The categories in which we operate are mature and highly competitive, both in the U.S. and globally, as a number of companies compete for consumer acceptance, limited retail shelf space and e-commerce opportunities. Because of the highly competitive environment in which we operate, as well as increasing retailer concentration, our retailer customers, including online retailers, frequently seek to obtain pricing concessions or better trade terms, resulting in either reduction of our margins or losses of distribution to lower cost competitors. Competition is based upon brand perceptions, product performance and innovation, customer service and price. Our ability to compete effectively may be affected by a number of factors, including:
•several of our competitors, including The Procter & Gamble Company, Unilever, Johnson & Johnson and others, may have substantially greater financial, marketing, research and development and other resources and greater market share in certain segments than we do, which could provide them with greater scale and negotiating leverage with retailers and suppliers, and other competitors are newer companies backed by private-equity investors with the goal of expanding revenue instead of profitability;
•our competitors may have lower production, sales and distribution costs, and higher profit margins, which may enable them to offer aggressive retail discounts and other promotional incentives;
•our competitors may be able to obtain exclusive distribution rights at particular retailers or favorable in-store placement;
•our retailers could reduce inventories, shift to different products, or require us to lower our prices to retain shelf placement of our products; and
•we may lose market share to private label brands sold by retail chains, or to price brands sold by local and regional competitors, which, in each case, are typically sold at lower prices than our products.
Loss of any of our principal customers could significantly decrease our sales and profitability.
Walmart, together with its subsidiaries, is our largest customer, accounting for approximately 22% of our net sales in fiscal 2020. Generally, sales to our top customers are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them. As a result, these customers may decrease their level of purchases from us at any time. The loss or a substantial decrease in the volume of purchases by any of our top customers would harm our sales and profitability. Increasing retailer customer concentration could result in reduced sales outlets for our products, as well as greater negotiating pressures and pricing requirements.
Changes in the policies of our retailer customers and increasing dependence on key retailer customers in developed markets may adversely affect our business.
In recent years, retailer consolidation both in the U.S. and internationally has increased. This trend has resulted in the increased size and influence of large consolidated retail customers, including internet-based retailers, who may demand lower pricing, special packaging or impose other requirements on us. These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship. Some of our customers, particularly our high-volume retail customers, have sought to obtain pricing and other concessions and better trade terms. To the extent we provide concessions or better trade terms to those customers, our margins are reduced. Further, if we are unable to effectively respond to the demands of our customers, these customers could reduce their purchases of our products and increase their purchases of products from competitors, which would harm our sales and profitability. In addition, reductions in inventory by our customers, including as a result of consolidations in the retail industry, or our customers managing their working capital requirements, could result in reduced orders for our products and adversely affect our results of operations for the financial periods affected by such reductions.
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Protracted unfavorable market conditions have caused many of our customers to more critically analyze the number of brands they sell, which could lead to the retailer reducing or discontinuing certain of our product lines, particularly those products that were not number one or two in their category.
Our inability to execute a successful e-commerce strategy could have a significant negative impact on our business.
Sales of consumer products via e-commerce has gained increasing importance among market participants as more end user customers purchase consumer goods through e-commerce. We are engaged in e-commerce sales channels with respect to many of our products; however, if e-commerce and other sales channels were to take significant market share away from traditional brick and mortar retailers, and if we are not successful in achieving sales growth in these sales channels, our business, financial condition and results of operations may be negatively impacted. While we are establishing an e-commerce footprint, there can be no assurances that these initiatives will be successful.
We face risks arising from our ongoing efforts to achieve cost savings.
In the normal course of business, we may initiate projects which change our footprint or our operations in order to gain efficiencies and reduce costs. The execution of cost savings initiatives may present a number of significant risks, including:
•actual or perceived disruption of service or reduction in service standards to customers;
•the failure to preserve adequate internal controls as we restructure our general and administrative functions, including our information technology and financial reporting infrastructure;
•the failure to preserve supplier relationships and distribution, sales and other important relationships and to resolve conflicts that may arise;
•loss of sales as we reduce or eliminate staffing on non-core product lines;
•diversion of management attention from ongoing business activities; and
•the failure to maintain employee morale and retain key employees while implementing benefit changes and reductions in the workforce.
Because of these and other factors, we cannot predict whether we will realize the purpose and anticipated benefits of these initiatives and, if we do not, our business and results of operations may be adversely affected.
Project Fuel was launched in fiscal 2018 and is an enterprise-wide transformational initiative that is designed to address all aspects of our business and cost structure. We have achieved gross savings of $212 million from the beginning of the program through the end of fiscal 2020 through the initiatives of Project Fuel, which is in line with our savings target for the program. The achievement of our savings target depends on our ability to successfully identify and realize savings opportunities. Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our company not realizing the anticipated benefits, or not realizing such anticipated benefits on our expected timetable. If we are unable to realize the anticipated savings, our results of operations, cash flows and financial condition may be adversely affected.
Changes in production costs, including raw material prices and tariffs, could erode our profit margins and negatively impact operating results.
Pricing and availability of raw materials, energy, shipping and other services needed for our business can be volatile due to general economic conditions, labor costs, production levels, import duties and tariffs and other factors beyond our control. There is no certainty that we will be able to offset future cost increases. This volatility can significantly affect our production costs and may, therefore, have a material adverse effect on our business, results of operations and financial condition.
We are currently dependent on third party manufacturers to manufacture many products for our business. Our business could suffer as a result of a third-party manufacturer’s inability to produce our products for us on time or to our specifications.
The inability of a third-party manufacturer to ship orders in a timely manner, in desirable quantities or to meet our safety, quality and social compliance standards or regulatory requirements could have a material adverse impact on our business. While certain of our relationships with these third parties are subject to minimum volume commitments, whereby the third-party manufacturer has committed to produce and we have committed to purchase a minimum quantity of product, we may nonetheless experience situations where such manufacturers are unable to fulfill their obligations under our agreements.
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Our manufacturing facilities, supply channels or other business operations may be subject to disruption from events beyond our control.
Operations of our manufacturing and packaging facilities worldwide, and of our corporate offices, and the methods we use to obtain supplies and to distribute our products, may be subject to disruption for a variety of reasons, including availability of raw materials, work stoppages, industrial accidents, disruptions in logistics, loss or impairment of key manufacturing sites, product quality or safety issues, licensing requirements and other regulatory issues, trade disputes between countries in which we have operations, and acts of war, terrorism, pandemics, fire, earthquake, hurricanes, flooding or other natural disasters. The supply of our raw materials may be similarly disrupted. There is also a possibility that third-party manufacturers, which produce a significant portion of certain of our products, could discontinue production with little or no advance notice, or experience financial problems or problems with product quality or timeliness of product delivery, resulting in manufacturing delays or disruptions, regulatory sanctions, product liability claims or consumer complaints. If a major disruption were to occur, it could result in delays in shipments of products to customers or suspension of operations. We maintain business interruption insurance to potentially mitigate the impact of business interruption, but such coverage may not be sufficient to offset the financial or reputational impact of an interruption.
Loss of reputation of our leading brands or failure of our marketing plans could have an adverse effect on our business.
We depend on the continuing reputation and success of our brands, particularly the Schick, Wilkinson Sword, Edge, Skintimate, Playtex, Wet Ones, Banana Boat, Hawaiian Tropic, Bulldog, Cremo, Jack Black, Stayfree, Carefree and o.b. brands. Our operating results could be adversely affected if one of our leading brands suffers damage to its reputation due to real or perceived quality issues. Further, the success of our brands can suffer if our marketing plans or new product offerings do not improve or have a negative impact on our brands’ image or ability to attract and retain consumers. Additionally, if claims made in our marketing campaigns become subject to litigation alleging false advertising, it could damage our brand, cause us to alter our marketing plans in ways that may materially and adversely affect sales, or result in the imposition of significant damages against us. Further, a boycott or other campaign critical of us, through social media or otherwise, could negatively impact our brands’ reputation and, consequently, our products’ sales.
Our business is subject to seasonal volatility.
Customer orders for sun care products within our Sun and Skin Care segment are highly seasonal, which has historically resulted in higher sun care sales to retailers during the late winter through mid-summer months. Accordingly, our sales, financial performance, working capital requirements and cash flow may experience volatility during these periods. Further, purchases of our sun care products can be significantly impacted by unfavorable weather conditions during the summer period, and as a result we may suffer decreases in net sales if conditions are not favorable for use of our products, which could in turn have a material adverse effect on our financial condition, results of operation and cash flows. Within our Wet Shave segment, sales of women’s products are moderately seasonal, with increased consumer demand in the spring and summer months.
Our financial performance depends on our ability to anticipate and respond to consumer trends and changes in consumer preferences. New product introductions may not be as successful as we anticipate, which could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
We have a rigorous process for the continuous development and evaluation of new product concepts, led by executives in marketing, sales, research and development, product development, operations, legal and finance. However, consumer preference and spending patterns change rapidly and cannot be predicted with certainty. There can be no assurance that we will anticipate and respond to trends for consumer products effectively. Each new product launch, including those resulting from our product development process, carries risks, as well as the possibility of unexpected consequences, including:
•the acceptance of our new product launches and sales of such new products may not be as high as we anticipate;
•our marketing, promotional, advertising and/or pricing strategies for our new products may be less effective than planned and may fail to effectively reach the targeted consumer base or engender the desired consumption of the products by consumers;
•we may incur costs exceeding our expectations as a result of the continued development and launch of new products, including, for example, unanticipated levels of research and development costs, advertising, promotional and/or marketing expenses, sales return expenses or other costs related to launching new products;
•we may experience a decrease in sales of certain of our existing products as a result of newly-launched products, the impact of which could be exacerbated by shelf space limitations and/or any shelf space loss;
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•our product pricing strategies for new product launches may not be accepted by customers and/or consumers, which may result in sales being less than we anticipate; and/or
•we may experience a decrease in sales of certain of our products as a result of counterfeit products and/or products sold outside of their intended territories.
Each of the risks referred to above could delay or impede our ability to achieve our sales objectives, which could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
Our business is subject to increasing global regulation, including product related regulations and environmental regulations, that may expose us to significant liabilities.
The manufacture, packaging, labeling, storage, distribution, advertising and sale of our products are subject to extensive regulation. For example, a number of our products are regulated by health authorities both in the U.S. and in the E.U. (such as the U.S. Food and Drug Administration), and by consumer protection organizations (such as the U.S. Consumer Product Safety Commission). These regulatory frameworks focus on our ingredients as well as the safety and efficacy of our products. Similarly, the advertising and marketing of our products is regulated by agencies such as the U.S. Federal Trade Commission. All of these regulatory frameworks exist at the federal, state and local level in the U.S. as well as in foreign countries where we sell our products. New or more restrictive regulations or more restrictive interpretations of existing regulations are likely and could lead to additional compliance costs and could have an adverse impact on our business. Additionally, a finding that we are in violation of, or not in compliance with, applicable laws or regulations could subject us to material civil remedies, including fines, damages, injunctions or product recalls, or criminal sanctions. Even if a claim is unsuccessful, is not merited or is not fully pursued, the negative publicity surrounding such assertions could jeopardize our reputation and brand image and have a material adverse effect on our businesses, as well as require resources to rebuild our reputation.
We must comply with various environmental laws and regulations in the jurisdictions in which we operate, including those relating to the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. A release of such substances due to an accident or intentional act could result in substantial liability to governmental authorities or to third parties. Pursuant to certain environmental laws, we could be subject to joint and several strict liability for contamination relating to our or our predecessors’ current or former properties or any of their respective third-party waste disposal sites. In addition to potentially significant investigation and remediation costs, any such contamination can give rise to claims from governmental authorities or other third parties for natural resource damage, personal injury, property damage or other liabilities. We have incurred, and will continue to incur, capital and operating expenses and other costs in complying with environmental laws and regulations, including remediation costs relating to our current and former properties and third-party waste disposal sites. As new laws and regulations are introduced, we could become subject to additional environmental liabilities in the future that could cause a material adverse effect on our results of operations or financial condition.
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There is an increased focus from certain investors, customers, consumers, employees, and other stakeholders concerning corporate citizenship and sustainability matters. From time to time, we announce certain initiatives, including goals, regarding our focus areas, which include environmental matters, packaging, responsible sourcing, social investments and diversity and inclusion. We could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could fail in accurately reporting our progress on such initiatives and goals. Such failures could be due to changes in our business (e.g., shifts in business among distribution channels or acquisitions). Moreover, the standards by which citizenship and sustainability efforts and related matters are measured are developing and evolving, and certain areas are subject to assumptions. The standards or assumptions could change over time. In addition, we could be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in connection with these matters. Any such matters, or related corporate citizenship and sustainability matters, could have a material adverse effect on our business.
We are subject to risks related to our international operations, including currency fluctuations, which could adversely affect our results of operations.
Our businesses are conducted on a worldwide basis, with nearly 44% of our sales in fiscal 2020 arising outside the U.S., and a significant portion of our production capacity and cash are located overseas. Consequently, we are subject to a number of risks associated with doing business in foreign countries, including:
•the possibility of expropriation, confiscatory taxation or price controls;
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•the ability to repatriate foreign-based cash effectively for strategic needs in the U.S., as well as the heightened counterparty, internal control and country-specific risks associated with holding cash overseas;
•the effect of foreign income taxes, value-added taxes and withholding taxes, including the inability to recover amounts owed to us by a government authority without extended proceedings or at all;
•the effect of the U.S. tax treatment of foreign source income and losses, and other restrictions on the flow of capital between countries;
•adverse changes in local investment or exchange control regulations;
•restrictions on and taxation of international imports and exports;
•legal and regulatory constraints, including tariffs and other trade barriers;
•currency fluctuations, including the impact of hyper-inflationary conditions, particularly where exchange controls limit or eliminate our ability to convert from local currency;
•political or economic instability, government nationalization of business or industries, government corruption and civil unrest, including political or economic instability; and
•difficulty in enforcing contractual and intellectual property rights.
One or more of these factors could harm our international operations or investments and our operating results.
Our business involves the potential for product liability and other claims against us, which could affect our results of operations and financial condition and result in product recalls or withdrawals.
We face exposure to claims arising out of alleged defects in our products, including for property damage, bodily injury or other adverse effects. We maintain product liability insurance, but this insurance does not cover all types of claims, particularly claims other than those involving personal injury or property damage or claims that exceed the amount of insurance coverage. Further, we may not be able to maintain such insurance in sufficient amounts, on desirable terms, or at all, in the future. In addition to the risk of monetary judgments not covered by insurance, product liability claims could result in negative publicity that could harm our products’ reputation and in certain cases require a product recall. Product recalls or product liability claims, and any subsequent remedial actions, could have a material adverse effect on our business, reputation, brand value, results of operations and financial condition.
If we fail to adequately protect our intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
The vast majority of our total net sales are from products bearing proprietary trademarks and brand names. In addition, we own or license from third parties a considerable number of patents, patent applications and other technology. We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. There is a risk that we will not be able to obtain and perfect or maintain our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. In addition, even if such rights are protected in the U.S., the laws of some other countries in which our products are or may be sold do not protect intellectual property rights to the same extent as the laws of the U.S. Our intellectual property rights could be invalidated, circumvented or challenged in the future, and we could incur significant costs in connection with legal actions relating to such rights. As patents expire, we could face increased competition or decreased royalties, either of which could negatively impact our operating results. If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales.
We may not be able to attract, retain and develop key personnel.
Our future performance depends in significant part upon the continued service of our executive officers and other key personnel. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our success also depends on our continuing ability to attract, retain and develop highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that we can retain and motivate our key employees or attract and retain other highly qualified personnel in the future.
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Legislative changes in applicable tax laws, policies and regulations or unfavorable resolution of tax matters may result in additional tax liabilities, which could adversely impact our cash flows and results of operations.
Our businesses are subject to taxation in the U.S. and multiple foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The changes included in the Tax Act are broad and complex and the impact of the Tax Act is subject to change as a result of changes in interpretations of the Tax Act, legislative action to address questions that arise from the Tax Act, changes in accounting standards for income taxes or related interpretations, updates or changes to estimates of current year earnings, exchange rates and other factors. In addition, international tax reform remains a priority with the Organization for Economic Cooperation and Development’s Action Plan on Base Erosion & Profit Shifting and other proposed foreign jurisdictional tax law changes. Given the uncertainty of the possible changes and their potential interdependency, we are unable to determine whether the net consolidated impact of changes in global tax legislation would be positive or negative. However, the impact of any legislative tax law, policy or regulation changes by federal, state, local and foreign authorities may result in additional tax liabilities which could adversely impact our cash flows and results of operations. Significant estimation and judgment are required in determining our provisions for taxes in the U.S. and jurisdictions outside the U.S. In the ordinary course of our business, there are transactions and calculations in which the ultimate tax determination is uncertain. We are regularly under audit by tax authorities, and although we believe our tax positions are defensible and our tax provision estimates are reasonable, the final outcome of tax audits and related litigation could be materially different than that reflected in our income tax provisions and accruals. The unfavorable resolution of any audits or litigation could have an adverse impact on future operating results and our financial condition. More aggressive and assertive tax collection policies, particularly in jurisdictions outside the U.S., may increase the costs of resolving tax issues and enhance the likelihood that we will have increased tax liabilities going forward.
We may not be able to continue to identify and complete strategic acquisitions and effectively integrate acquired companies to achieve desired financial benefits.
We have completed a number of acquisitions, and we expect to continue making acquisitions if appropriate opportunities arise. Acquisitions could be a key use of our cash and a potential driver of future growth. However, we may not be able to identify and successfully negotiate suitable strategic acquisitions at attractive valuations, obtain financing for future acquisitions on satisfactory terms or otherwise complete future acquisitions. Our reduced size relative to other companies in our industry may make completing desirable acquisitions more challenging.
If we can complete future acquisitions, we may face significant challenges in consolidating functions and effectively integrating procedures, personnel, product lines, and operations in a timely and efficient manner. The integration process can be complex and time consuming, may be disruptive to our existing and acquired business and may cause an interruption of, or a loss of momentum in, the business. Even if we can successfully complete the integration of acquired businesses into our operations, there is no assurance that anticipated cost savings, synergies, or revenue enhancements will be realized within the expected time frame, or at all. Such acquisitions may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, restructuring charges, impairment charges, contingent liabilities, amortization expenses related to intangible assets, and increased operating expenses, which could adversely affect our results of operations and financial condition.
A failure of a key information technology system or a breach of our information security could adversely impact our ability to conduct business.
We rely extensively on information technology systems in order to conduct business, including some that are managed by third-party service providers. These systems include, but are not limited to, programs and processes relating to internal and external communications, ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reporting results of operations, and complying with regulatory, legal or tax requirements. These information technology systems could be damaged or cease to function properly due to the poor performance or failure of third-party service providers, catastrophic events, power outages, network outages, failed upgrades or other similar events. If our business continuity plans do not effectively resolve such issues on a timely basis, we may suffer interruptions in conducting our business which may adversely impact our operating results.
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Further, our systems and networks, as well as those of our retailer customers, suppliers, service providers, and banks, may become the target of advanced cyber-attacks or information security breaches which will pose a risk to the security of our services, systems, networks and supply chain, as well as to the confidentiality, availability and integrity of data of our Company, employees, customers or consumers, and disrupt our operations or damage our facilities or those of third parties. As cybersecurity threats rapidly evolve in sophistication and become more prevalent across the industry globally, we are continually increasing our attention to these threats. We assess potential threats and vulnerabilities and make investments seeking to address them, including ongoing monitoring and updating of networks and systems, increasing specialized information security skills, deploying employee security training, and updating security policies for our Company and our third-party providers. However, because the techniques, tools and tactics used in cyber-attacks frequently change and may be difficult to detect for periods of time, we may face difficulties in anticipating and implementing adequate preventative measures or fully mitigating harms after such an attack. As a result, a cyber-attack could negatively impact our net sales and increase our operating and capital costs. In addition, our employees frequently access our suppliers’ and customers’ systems and we may be liable if our employees are the source of any breaches in these third-party systems. It could also damage our reputation with retailer customers and consumers and diminish the strength and reputation of our brands, or require us to pay monetary penalties.
Periodically, we also need to upgrade our information technology systems or adopt new technologies. If such a new system or technology does not function properly or otherwise exposes us to increased cybersecurity breaches and failures, it could affect our ability to order materials, make and ship orders, and process payments in addition to other operational and information integrity and loss issues. Further, if the information technology systems, networks or service providers we rely upon fail to function properly or cause operational outages or aberrations, or if we or one of our third-party providers suffer significant unavailability of key operations, or inadvertent disclosure of, lack of integrity of, or loss of our sensitive business or stakeholder information, due to any number of causes, ranging from catastrophic events or power outages to improper data handling, security incidents or employee error or malfeasance, and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive, operational, financial and business harm as well as litigation and regulatory action. The costs and operational consequences of responding to the above items and implementing remediation measures could be significant and could adversely impact our results.
Impairment of our goodwill and other intangible assets would result in a reduction in net income.
We have a material amount of goodwill, trademarks and other intangible assets, as well as other long-lived assets, which are periodically evaluated for impairment in accordance with current accounting standards. Declines in our profitability and estimated cash flows related to specific intangible assets, as well as potential changes in market valuations for similar assets and market discount rates, may result in an impairment charge, which could have an adverse impact on our operating results.
Our access to capital markets and borrowing capacity could be limited.
Our access to capital markets to raise funds through the sale of debt or equity securities is subject to various factors, including general economic and financial market conditions. Significant reduction in market liquidity conditions could impact access to funding and increase associated funding costs, which could reduce our earnings and cash flows. Additionally, disruptions in financial markets could reduce our access to debt and equity capital markets, negatively affecting our ability to implement our business plan and strategy.
Our access to debt financing at competitive risk-based interest rates is partly a function of our credit ratings. The major credit rating agencies periodically evaluate our creditworthiness and have assigned us credit ratings. These ratings are based on a number of factors, which include our financial strength and financial policies as well as our strategies, operations and execution. A downgrade to our credit ratings could increase our interest rates, limit our access to public debt markets, limit the institutions willing to provide us credit facilities, result in more restrictive credit arrangements and make any future credit facilities or credit facility amendments more costly and difficult to obtain.
We have a substantial level of indebtedness and are subject to various covenants relating to such indebtedness, which could limit our discretion to operate and grow our business.
As of September 30, 2020, our debt level was approximately $1.3 billion. We may be required to dedicate a substantial portion of our cash to debt service, thereby reducing funds available to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes. Our failure to make scheduled interest payments or to repay or refinance the indebtedness at maturity or obtain additional financing as needed could have a material adverse effect on our business.
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Additionally, certain of our debt instruments are subject to certain financial and other covenants, including debt ratio tests. We may be in breach of such covenants in the event of future declines in our operating cash flows or earnings performance, foreign currency movements or other events. In the event of such breach, our lenders may be entitled to accelerate the related debt as well as any other debt to which a cross-default provision applies, and we could be required to seek amendments or waivers under the debt instruments or to refinance the debt. There is no assurance that we would obtain such amendments or waivers or effect such refinancing, or that we would be able to do so on terms similar to those of our current debt instruments. The covenants and financial ratio requirements contained in our debt instruments could also:
•increase our vulnerability to general adverse economic and industry conditions;
•require a substantial portion of our cash flow from operations to make payments on our indebtedness;
•reduce the cash flow available or limit our ability to borrow additional funds, to pay dividends, to fund capital expenditures and other corporate purposes and to pursue our business strategies;
•limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; and
•place us at a competitive disadvantage relative to our competitors that have greater financial flexibility or limit, among other things, our ability to borrow additional funds as needed or take advantage of business opportunities as they arise.
Our Revolving Credit Facility (See Liquidity and Capital Resources for details) contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends, and other distributions, entry into new lines of business, use of loan proceeds, restrictions on liens on the assets of the Company and our subsidiaries, transactions with affiliates and dispositions. The breach of any of these covenants could result in a default under the Revolving Credit Facility. In addition, the Revolving Credit Facility contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other material indebtedness, bankruptcy and insolvency events, material judgments and change of control provisions. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Revolving Credit Facility could be accelerated and the lenders thereunder could foreclose on their security interests in the assets of the Company and certain of our subsidiaries.
Our financial results could be adversely impacted by the U.K.’s departure from the E.U.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit,” and on March 29, 2017, the U.K. began the process to withdraw from the E.U. Volatility in exchange rates is expected to continue as the U.K. negotiates its exit from the E.U. Given the lack of comparable precedent, the implications of Brexit or how such implications might affect us and our operations are unclear. Brexit could, among other things, disrupt trade and the free movement of goods, services and people between the U.K. and the E.U. or other countries, as well as create legal and global economic uncertainty. For fiscal 2020, net sales of our U.K. operations were 4% of our consolidated net sales. These and other potential implications of Brexit could adversely affect our business and financial results.
If the U.K. and the E.U. are not able to agree on a trade deal, it will likely have an adverse impact on labor and trade, in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the E.U. and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the E.U. will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. These changes to the trading relationship between the U.K and E.U. would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations. A weaker British pound versus the U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
18
We may experience losses or be subject to increased funding and expenses related to our pension plans.
The funding obligations for our pension plans are impacted by the performance of the financial markets, interest rates and governmental regulations. While the pension benefit earned to date by active participants under our legacy U.S. pension plan was frozen effective January 1, 2014, and retirement service benefits no longer accrue under this retirement program, our pension obligations are expected to remain significant. If the investment of plan assets does not provide the expected long-term returns, if interest rates or other assumptions change, or if governmental regulations change the timing or amounts of required contributions to the plans, we could be required to make significant additional pension contributions which may have an adverse impact on our liquidity, our ability to comply with debt covenants and may require recognition of increased expense within our financial statements.
Risks Related to the Separation of the Household Products Business
Indemnifications under the separation agreement with New Energizer or New Energizer’s inability to satisfy indemnification obligations in the future could negatively impact our financial results.
Pursuant to the separation agreement and certain other agreements with New Energizer, New Energizer agreed to indemnify us for certain liabilities, and we agreed to indemnify New Energizer for certain liabilities, in each case for uncapped amounts. Indemnities that we may be required to provide New Energizer may be significant and could negatively impact our business. Further, the indemnity from New Energizer may not be sufficient to protect us against the full amount of such liabilities, and New Energizer may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from New Energizer any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of September 30, 2020, we owned or leased 59 properties, 27 in the U.S. and 32 globally. Ten of these properties are used as production plants consisting of 1.8 million square feet that is owned and 0.8 million square feet that is leased. Five of these plants are located in the U.S., and five are in other countries. Six of these plants are used exclusively by our Wet Shave segment, one by our Feminine Care segment, two by our Sun and Skin Care segment and one is shared by our Wet Shave and Sun and Skin Care segments. We also have 12 warehouses, totaling 0.6 million square feet, all of which are leased. We operate from 37 different offices throughout the world, totaling 0.5 million square feet, all of which are leased, and includes our corporate headquarters in Shelton, Connecticut. We believe all of our facilities are well-maintained and suitable for the operations conducted in them.
Item 3. Legal Proceedings.
We, and our affiliates, are subject to a number of legal proceedings in various jurisdictions arising out of our operations during the ordinary course of business. Many of these legal matters are in preliminary stages and involve complex issues of law and fact, and may proceed for protracted periods of time. The amount of liability, if any, from these proceedings cannot be determined with certainty. We review our legal proceedings and claims, regulatory reviews and inspections on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, we believe that our liability, if any, arising from such pending legal proceedings, asserted legal claims and known potential legal claims, which are likely to be asserted, is not reasonably likely to be material to our financial position, results of operations or cash flows, taking into account established accruals for estimated liabilities.
See also the discussion captioned “Governmental Regulation and Environmental Matters” included within Item 1. Business of this Annual Report on Form 10-K.
19
Item 4. Mine Safety Disclosures.
Not applicable.
20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Edgewell common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “EPC.”
There were approximately 5,725 shareholders of record of our common stock as of October 31, 2020.
Issuer Purchases of Equity Securities
In January 2018, our Board of Directors approved an authorization to repurchase up to 10.0 million shares of our common stock. This authorization replaced a prior share repurchase authorization from May 2015. The following table sets forth the purchases of our Company’s securities by our Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) (17 CFR 240.10b-18(a)(3)) during the fourth quarter of fiscal 2020:
| Period |
Total Number of Shares
Purchased (1)
|
Average Price Paid per Share (2)
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| July 1, 2020 to July 31, 2020 | 9,744 | $ | 30.91 | — | 10,000,000 | |||||||||||||||||||||
| August 1, 2020 to August 31, 2020 | — | $ | — | — | 10,000,000 | |||||||||||||||||||||
| September 1, 2020 to September 30, 2020 | — | $ | — | — | 10,000,000 | |||||||||||||||||||||
(1)9,744 shares purchased during the quarter relate to the surrender of shares of common stock to our Company to satisfy tax withholding obligations in connection with the vesting of restricted stock equivalents.
(2)Includes $0.02 per share of brokerage fee commissions.
During fiscal 2020, we did not repurchase any shares of common stock under the share repurchase authorization from January 2018. Future share repurchases, if any, would be made in the open market, privately negotiated transactions or otherwise, in such amounts and at such times as we deem appropriate based upon prevailing market conditions, business needs and other factors.
During fiscal 2020, we repurchased 61,949 shares related to the surrender of shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock equivalent awards.
21
Performance Graph
The following graph compares the cumulative five-year total return provided to shareholders of Edgewell Personal Care Company’s common stock relative to the cumulative total returns of the S&P Midcap 400 index and the S&P Household Products index. An investment of $100 (with reinvestment of all dividends and other distributions) is assumed to have been made in our common stock and in each of the indices on September 30, 2015 and its relative performance is tracked through September 30, 2020. These indices are included only for comparative purposes as required by SEC rules and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. They are not intended to forecast possible future performance of our common stock, nor is our historical common stock price performance necessarily indicative of our future common stock price performance.
* $100 invested on September 30, 2015 in stock or index, with reinvestment of all dividends. Fiscal year ending September 30.
Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.
| 9/15 | 9/16 | 9/17 | 9/18 | 9/19 | 9/20 | |||||||||||||||||||||||||||||||||
| Edgewell Personal Care Company | $ | 100.00 | $ | 97.45 | $ | 89.18 | $ | 56.65 | $ | 39.82 | $ | 34.17 | ||||||||||||||||||||||||||
| S&P Midcap 400 | $ | 100.00 | $ | 113.39 | $ | 131.19 | $ | 147.53 | $ | 141.39 | $ | 135.97 | ||||||||||||||||||||||||||
| S&P Household Products | $ | 100.00 | $ | 120.76 | $ | 121.05 | $ | 116.55 | $ | 157.88 | $ | 175.13 | ||||||||||||||||||||||||||
22
Item 6. Selected Financial Data.
The selected historical financial data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and accompanying notes included in Item 8. Financial Statements and Supplementary Data.
(in millions, except per share data)
| Statements of Earnings Data | Fiscal Year | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Net sales | $ | 1,949.7 | $ | 2,141.0 | $ | 2,234.4 | $ | 2,298.4 | $ | 2,362.0 | |||||||||||||||||||
| Depreciation and amortization | 88.8 | 93.8 | 97.6 | 96.2 | 96.5 | ||||||||||||||||||||||||
|
Earnings (loss) before income taxes (2)
|
87.3 | (390.3) | 163.8 | (52.9) | 219.9 | ||||||||||||||||||||||||
| Net earnings (loss) | $ | 67.6 | $ | (372.2) | $ | 103.3 | $ | 5.7 | $ | 178.7 | |||||||||||||||||||
| Basic earnings (loss) per share | 1.25 | (6.88) | 1.90 | 0.10 | 3.02 | ||||||||||||||||||||||||
| Diluted earnings (loss) per share | 1.24 | (6.88) | 1.90 | 0.10 | 2.99 | ||||||||||||||||||||||||
| Balance Sheet Data | As of September 30, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
|
Working capital (1)
|
$ | 473.1 | $ | 384.8 | $ | 234.2 | $ | 661.8 | $ | 583.8 | |||||||||||||||||||
| Property, plant and equipment, net | 370.9 | 396.0 | 424.1 | 453.4 | 486.1 | ||||||||||||||||||||||||
| Total assets | 3,540.9 | 3,420.9 | 3,953.3 | 4,188.8 | 4,771.5 | ||||||||||||||||||||||||
| Long-term debt | 1,237.9 | 1,097.8 | 1,103.8 | 1,525.4 | 1,544.2 | ||||||||||||||||||||||||
(1)Working capital represents current assets less current liabilities.
(2)Earnings (loss) before income taxes were impacted by the following items:
| Fiscal Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Impairment charges | $ | — | $ | (570.0) | $ | (24.4) | $ | (319.0) | $ | (6.5) | |||||||||||||||||||
| Restructuring and related costs | (38.1) | (55.6) | (39.9) | (30.3) | (38.8) | ||||||||||||||||||||||||
| Acquisition and integration planning costs | (39.8) | (6.7) | (5.2) | — | — | ||||||||||||||||||||||||
| Cost of early retirement of long-term debt | (26.2) | — | — | — | — | ||||||||||||||||||||||||
| Gain on sale of Infant and Pet Care business | 4.1 | — | — | — | — | ||||||||||||||||||||||||
| COVID-19 expenses | (4.3) | — | — | — | — | ||||||||||||||||||||||||
| Sun Care reformulation costs | — | (2.8) | (25.3) | — | — | ||||||||||||||||||||||||
| Feminine and Infant Care evaluation costs | (0.3) | (2.1) | — | — | — | ||||||||||||||||||||||||
| Investor settlement expense | — | (0.9) | — | — | — | ||||||||||||||||||||||||
| Gain on sale of Playtex gloves assets | — | — | 15.3 | — | — | ||||||||||||||||||||||||
| Pension settlement expense | — | — | (5.4) | — | — | ||||||||||||||||||||||||
| Spin costs | — | — | — | — | (12.0) | ||||||||||||||||||||||||
| Industrial sale charges | — | — | — | — | (0.2) | ||||||||||||||||||||||||
| Total | $ | (104.6) | $ | (638.1) | $ | (84.9) | $ | (349.3) | $ | (57.5) | |||||||||||||||||||
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(in millions, except per share data)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included in this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A. Risk Factors and “Forward-Looking Statements” included within this Annual Report on Form 10-K.
While we report financial results in accordance with generally accepted accounting principles (“GAAP”), this discussion also includes non-GAAP measures. These non-GAAP measures are referred to as “adjusted” or “organic” and exclude items such as impairment charges, restructuring charges, acquisition and integration costs, and the divestiture of the Infant and Pet Care business. Reconciliations of non-GAAP measures are included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We use this non-GAAP information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of ongoing operating results. Given the various significant events which occurred during fiscal 2020, including Project Fuel restructuring, acquisition related expenses and the early retirement of the $600 Senior Notes due 2021, we view the use of non-GAAP measures that take into account the impact of these unique events as particularly valuable in understanding our underlying operational results and providing insights into future performance.
The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by the types of items that are excluded. This non-GAAP information is also a component in determining management’s incentive compensation. Finally, we believe this information provides more transparency. The following provides additional detail on our non-GAAP measures:
•We analyze our net sales and segment profit on an organic basis to better measure the comparability of results between periods. Organic net sales exclude the impact of changes in foreign currency, acquisitions, and dispositions. This information is provided because these fluctuations can distort the underlying change in net sales either positively or negatively. For the year ended September 30, 2020, the impact of divestitures includes the Infant and Pet Care business, which was sold in December 2019, and the impact of acquisitions includes the acquisition of Cremo in September 2020. For the year ended September 30, 2019, the impact of acquisitions includes net sales and segment profit activity for Jack Black through February 2019. For the year ended September 30, 2019, the impact of dispositions includes October 2017 net sales and segment profit for the Playtex gloves assets. For the year ended September 30, 2018, the impact of acquisitions includes net sales and segment profit activity for Jack Black from March through September 2018 and Bulldog net sales and segment profit for October 2017. For the year ended September 30, 2018, the impact of dispositions includes November 2016 through September 2017 net sales and segment profit for the Playtex gloves assets.
•Adjusted net earnings and adjusted earnings per share are defined as net earnings and diluted earnings per share excluding items such as impairment charges, restructuring charges, acquisition and integration costs, cost of early debt retirement, COVID-19 pandemic expenses, advisory expenses in connection with the evaluation of the Feminine and Infant Care businesses, Sun Care reformulation costs, pension settlement expense, investor settlement expenses, the disposition of the Infant and Pet Care business and the Playtex gloves assets, the related tax effects of these items and the impact of the Tax Act.
•Adjusted effective tax rate is defined as the effective tax rate excluding items such as impairment charges, restructuring charges, acquisition and integration costs, cost of early debt retirement, COVID-19 pandemic expenses, advisory expenses in connection with the evaluation of the Feminine and Infant Care businesses, Sun Care reformulation costs, pension settlement expense, investor settlement expenses, the disposition of the Infant and Pet Care business and the Playtex gloves assets, the related tax effects of these items and the impact of the Tax Act.
All comparisons are with the same period in the prior year, unless otherwise noted.
24
Impact of COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a worldwide pandemic, which has impacted individuals, families, companies and economies around the world. Due to the uncertainty surrounding COVID-19 and its fast spreading nature, global leaders have taken significant measures to keep their people safe, including asking people to stay home unless they are considered essential employees, closing offices and retail locations and cancelling all non-essential travel. Governmental policies have continued to evolve, which have included phased policies with the intention to slowly reopen the local and global economies. We continue to take significant measures to protect our employees and business during the reopening process. As a result of these COVID-19 related measures, we have incurred increased costs including increased employee costs, such as emergency pay and expanded benefits, and other operating costs, such as cleaning costs, personal protective equipment purchases and increased airfreight expenses, which have negatively impacted our profitability, partially offset by government credits provided to the Company through the CARES Act. These incremental net charges totaled $4.3 in fiscal 2020.
The Company’s top priority during this time continues to be ensuring the health and welfare of our employees. Additional measures have been put in place at all of our manufacturing locations to ensure the safety of our employees, including thermal scanning, requiring the use of proper protective gear, making hand sanitizer widely available throughout our facilities and following social distancing guidelines. Additionally, we have implemented work-from-home policies for our employees that can work from home and have cancelled all non-essential company travel. We have not had any material operational disruption across our manufacturing and distribution facilities. There has been a slight increase in the level of absenteeism as our employees are taking intermittent leave; however, this has not caused a significant disruption in our operations.
As noted within the discussion of our consolidated results below, our earnings were negatively impacted by the COVID-19 pandemic for the year ended September 30, 2020, which was largely driven by a decrease in demand for our Sun Care products, as the impact of the stay-at-home orders and phased approach to re-opening local economies has reduced vacation travel and certain outdoor activities. This decline was partially offset by an increase in demand for Wet Ones, due largely to consumers’ increased focus on personal hygiene. We expect to see continued strong demand for Wet Ones going forward. The impact that COVID-19 continues to have on our customers and their cash flows and ability to operate remains uncertain at this time. However, in some cases we have seen changes in payment patterns, requests for extended payment terms or impact to customer operations, resulting in an increase in our bad debt expense. As the duration and severity of the COVID-19 pandemic continues to affect economic conditions and therefore consumer spending and demand, we will continue to closely monitor the impact it has on our business and customers.
We continue to closely monitor our supply chain and, to date, have not experienced any significant issues securing key ingredients for our products. The continued duration and severity of COVID-19 may result in disruptions related to our key suppliers going forward; however, the impact, timing and severity of potential disruptions cannot be reasonably estimated at this time.
We experienced increased volatility in foreign currency exchange rates and commodity prices in fiscal 2020, which we believe is largely due to the economic uncertainty from COVID-19 and the depreciation of certain foreign currencies against the U.S. dollar. We expect to see continued volatility in the foreign currency exchange rates; however, we cannot estimate the impact at this time.
We expect to maintain adequate liquidity during these uncertain times. As noted within “Liquidity and Capital Resources” below, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources, including our ability to enter into the unsecured indenture agreement for 5.50% Senior Notes in the amount of $750 due June 1, 2028 (“2028 Notes”), or to replace our former unsecured revolving credit facility in the U.S. with a new secured revolving credit facility in an aggregate principal amount of $425 (the “Revolving Credit Facility”). We will continue to assess the impact that COVID-19 has on our liquidity needs and the current economic market conditions.
Significant Events
Acquisitions
On September 2, 2020, the Company completed the acquisition of Cremo, a premier men's grooming company in the U.S, in an all-cash transaction at a purchase price of $233.6. As a result of the acquisition, Cremo became a wholly owned subsidiary of the Company. Refer to Note 3 of Notes to Consolidated Financial Statements for further discussion on the Cremo acquisition.
25
Divestiture
On December 17, 2019, we completed the sale of our Infant and Pet Care business included in the All Other segment for $122.5, which included consideration for providing services for up to one year under a transition services agreement. For further information on the divestiture of the Infant and Pet Care business, refer to Note 3 of Notes to Consolidated Financial Statements.
Goodwill and Intangible Asset Impairment
The Company performs an annual test for impairment of goodwill and indefinite-lived intangible assets. The annual test performed in the fourth quarter of fiscal 2020 did not indicate that the Company’s goodwill and intangible assets had a fair value below the carrying value.
During the third quarter of fiscal 2019, we determined a triggering event had occurred as a result of a decline in our market capitalization after a decline in the Company’s share price. We performed an interim impairment analysis using financial information through June 30, 2019 and forecasts for cash flows developed using our three-year strategic plan. The interim impairment review was performed on all long-lived assets, including definite-lived intangibles, goodwill, and indefinite-lived intangible assets. The results of the impairment review indicated the carrying value of the goodwill of the Wet Shave, Infant Care, and Skin Care reporting units were greater than their respective fair values, resulting in a non-cash goodwill impairment of $369.0, $37.0, and $2.0, respectively. Additionally, the carrying value of the Wet Ones and Diaper Genie trade names were greater than the fair values and resulted in non-cash impairments of the indefinite-lived intangible assets of $87.0 and $75.0, respectively. We performed an assessment in the fourth quarter of fiscal 2019 to determine if any significant events or changes in circumstances had occurred that would be considered a potential triggering event. We did not identify any indication of a triggering event that would indicate the existence of additional impairment of the reporting units, indefinite-lived intangible assets, and definite-lived intangible assets.
During the third quarter of fiscal 2018, we determined a triggering event had occurred as a result of a sustained decline in our market capitalization. We performed an interim impairment analysis using financial information through June 30, 2018 and forecasts for cash flows developed using our strategic plan. The interim impairment review was performed across all reporting units and indefinite-lived intangible assets and we found the carrying value of the goodwill of our Infant Care reporting unit to be above its fair value, resulting in a non-cash goodwill impairment charge of $24.4. The impairment of the Infant Care reporting unit was caused by declining revenue and earnings forecasts and higher discount rates. Higher discount rates were the result of certain market-based assumptions and company specific risks.
Refer to Notes 2 and 7 of Notes to Consolidated Financial Statements for further discussion on the annual impairment test.
Project Fuel
Project Fuel is an enterprise-wide transformational initiative that was launched in the second quarter of fiscal 2018 to address all aspects of our business and cost structure, simplifying and transforming our organization, structure and key processes. Project Fuel is facilitating further re-investment in our growth strategy while enabling us to achieve our desired future state operations.
In addition to the expected cost savings, Project Fuel is designed to strengthen our challenger culture and reinforce our consumer-centric organizational focus. It is also designed to simplify the organization and streamline ways of working in order to increase competitiveness, speed and agility, and ensure we have the skills, capabilities and investments needed to compete in a rapidly changing world.
We expect that Project Fuel will generate $265 to $275 in total annual gross savings by the end of the 2021 fiscal year. The savings generated will be used to fuel investments and brand building in strategic growth initiatives, offset anticipated operational cost headwinds from inflation and other rising input costs and improve our overall profitability and cash flows. Project Fuel related gross savings were approximately $74 in fiscal 2020, bringing cumulative gross savings to approximately $212.
To implement the restructuring element of Project Fuel, we estimated one-time pre-tax charges to be approximately $160 to $165, with an additional capital investment of $70 to $80 through the end of fiscal year 2021. Project Fuel restructuring charges were $38.1 for fiscal 2020, bringing cumulative Project Fuel restructuring charges to $133.6. Additionally, capital expenditures for Project Fuel were $24.4 in fiscal 2020, bringing cumulative capital expenditures for Project Fuel to $58.1.
For further information on our restructuring projects, refer to Note 4 of Notes to Consolidated Financial Statements.
26
Sun Care Reformulation Costs
As a result of discussions with one of our suppliers during the fourth quarter of fiscal 2018, we made certain supply chain and procurement decisions, including implementing a raw material substitution due to anticipated regulatory changes related to European Union Regulation (EC) No. 1907/2006 concerning the Registration, Evaluation, Authorization, and Restriction of Chemicals, establishing a European Chemical Agency (“REACH”), that affected the supply chain of select Sun Care products. To align with our raw material selection process, we chose to make those changes in advance of the fiscal 2019 Sun Care season to minimize potential impact to our distribution channels during the peak sales period.
We incurred charges totaling $2.8 in Cost of products sold in fiscal 2019 as a result of the changes to our supply chain. Fiscal 2018 had charges totaling $25.3 to Cost of products sold, primarily due to costs associated with the write-off of select sun care product inventories.
27
Executive Summary
Following is a summary of key results for fiscal 2020, 2019 and 2018. Net earnings and diluted earnings per share (“EPS”) for the time periods presented were impacted by impairment charges, restructuring charges, acquisition and integration costs, cost of early debt retirement, COVID-19 pandemic expenses, advisory expenses in connection with the evaluation of the Feminine and Infant Care businesses, Sun Care reformulation costs, pension settlement expense, investor settlement expenses, the disposition of the Infant and Pet Care business and the Playtex gloves assets, the related tax effects of these items and the impact of the Tax Act. The impact of these items on reported net earnings and EPS are provided below as a reconciliation of net earnings and EPS to adjusted net earnings and adjusted diluted EPS, which are non-GAAP measures.
Fiscal 2020
•Net sales of $1,949.7 decreased 8.9% from fiscal 2019, inclusive of a 0.2% increase due to the acquisition of Cremo, a 4.4% decrease due to the sale of the Infant and Pet Care business and a 0.3% decrease due to currency movements. Excluding the impact of the Cremo acquisition, the sale of the Infant and Pet Care business and currency movements, organic net sales decreased 4.4% for fiscal 2020 as compared to the prior year period, as declines primarily in Wet Shave and Sun Care products were partially offset by growth in Skin Care driven by Wet Ones and grooming products.
•Net earnings for fiscal 2020 was $67.6, as compared to a net loss of $372.2 in the prior fiscal year. On an adjusted basis, as illustrated in the table below, net earnings for fiscal 2020 decreased 21.2% to $148.8. The decline was primarily driven by lower net sales and increased Selling, general and administrative expenses (“SG&A”), partially offset by improved gross margin percentage and lower Advertising and sales promotion expense (“A&P”) compared to the prior year.
•Net earnings per diluted share during fiscal 2020 was $1.24 compared to a loss of $6.88 in the prior fiscal year. On an adjusted basis, as illustrated in the table below, net earnings per diluted share during fiscal 2020 were $2.73 compared to $3.48 in the prior year.
| Fiscal Year | |||||||||||||||||||||||||||||||||||
| Net Earnings | Diluted EPS | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Net Earnings (Loss) and Diluted EPS - GAAP | $ | 67.6 | $ | (372.2) | $ | 103.3 | $ | 1.24 | $ | (6.88) | $ | 1.90 | |||||||||||||||||||||||
|
Impairment charges (1)
|
— | 570.0 | 24.4 | — | 10.54 | 0.73 | |||||||||||||||||||||||||||||
|
Restructuring and related costs (2)
|
38.1 | 55.6 | 39.9 | 0.70 | 1.03 | 0.45 | |||||||||||||||||||||||||||||
|
Acquisition and integration planning (3)
|
39.8 | 6.7 | 5.2 | 0.73 | 0.12 | 0.10 | |||||||||||||||||||||||||||||
| Cost of early retirement of long-term debt | 26.2 | — | — | 0.48 | — | — | |||||||||||||||||||||||||||||
| Gain on sale of Infant and Pet Care business | (4.1) | — | — | (0.08) | — | — | |||||||||||||||||||||||||||||
|
COVID-19 expenses (4)
|
4.3 | — | — | 0.08 | — | — | |||||||||||||||||||||||||||||
|
Sun Care reformulation costs (5)
|
— | 2.8 | 25.3 | — | 0.05 | 0.46 | |||||||||||||||||||||||||||||
|
Feminine and Infant Care evaluation costs (6)
|
0.3 | 2.1 | — | 0.01 | 0.04 | — | |||||||||||||||||||||||||||||
|
Investor settlement expense (7)
|
— | 0.9 | — | — | 0.02 | — | |||||||||||||||||||||||||||||
| Gain on sale of Playtex gloves assets | — | — | (15.3) | — | — | (0.28) | |||||||||||||||||||||||||||||
|
Pension settlement expense (8)
|
— | — | 5.4 | — | — | 0.10 | |||||||||||||||||||||||||||||
|
Impact of dilutive shares (9)
|
— | — | — | — | (0.01) | — | |||||||||||||||||||||||||||||
|
Income taxes (10)
|
(23.4) | (77.1) | 3.4 | (0.43) | (1.43) | 0.06 | |||||||||||||||||||||||||||||
|
Adjusted Net Earnings and Adjusted Diluted EPS - Non-GAAP
|
$ | 148.8 | $ | 188.8 | $ | 191.6 | $ | 2.73 | $ | 3.48 | $ | 3.52 | |||||||||||||||||||||||
| Weighted-average shares outstanding - Diluted | 54.6 | 54.1 | 54.5 | ||||||||||||||||||||||||||||||||
(1)Impairment charges reflect the impact of the goodwill and intangible asset impairments recorded in fiscal 2019 and 2018. Refer to Note 7 of Notes to Consolidated Financial Statements for further discussion on impairment charges.
(2)Restructuring costs associated with Project Fuel includes SG&A of $13.3, $8.6, and $1.4 for fiscal 2020, 2019, and 2018, respectively, associated with certain information technology enablement expenses and incentive and retention compensation expenses for Project Fuel. Additionally, it includes Cost of products sold of $0.2 and $0.6 for fiscal 2020 and 2019, respectively, related to inventory obsolescence write-offs.
(3)Includes SG&A of $39.2, $6.7, and $3.4 for fiscal 2020, 2019 and 2018, respectively, related to integration expenses associated with acquisitions and Cost of products sold of $0.6 and $1.8 related to the valuation of acquired inventory for fiscal 2020 and 2018, respectively.
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(4)Includes pre-tax Cost of products sold of $4.3 for fiscal 2020 which included incremental costs incurred by the Company related to higher benefit and emergency payments, supplies and freight.
(5)Includes Cost of products sold of $2.8 and $25.3 for fiscal 2019 and 2018, respectively, associated with supply chain changes and inventory write-offs on select Sun Care products.
(6)Includes pre-tax SG&A of $0.3 and $2.1 for fiscal 2020 and 2019, respectively, associated with consulting costs incurred in connection with the evaluation of our Feminine Care and Infant Care segments.
(7)Includes pre-tax SG&A of $0.9 for fiscal 2019 associated with a settlement with an investor.
(8)Pension settlement expense was the result of increased lump sum benefit payments in fiscal 2018 from higher employee turnover associated with Project Fuel. The lump sum benefit payments are not expected to be recurring in nature.
(9)GAAP EPS was calculated using basic weighted average shares outstanding due to a net loss. Adjusted diluted EPS was calculated using diluted weighted average shares outstanding.
(10)Includes the impact of the Tax Act totaling $3.6 and $21.3 in Income tax expense for fiscal 2019 and 2018, respectively, in addition to the tax impact of the other adjustments to Net Earnings (Loss) and Diluted EPS - GAAP.
Operating Results
The following table presents changes in net sales for fiscal 2020 and 2019, as compared to the corresponding prior year period, and provides a reconciliation of organic net sales to reported amounts.
Net Sales
| Net Sales - Total Company | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 2,141.0 | $ | 2,234.4 | |||||||||||||||||||
| Organic | (94.9) | (4.4) | % | (76.9) | (3.4) | % | |||||||||||||||||
| Impact of Infant and Pet Care sale | (93.4) | (4.4) | % | — | — | % | |||||||||||||||||
| Impact of Cremo acquisition | 4.5 | 0.2 | % | — | — | % | |||||||||||||||||
| Impact of Playtex gloves asset sale | — | — | % | (1.0) | — | % | |||||||||||||||||
| Impact of Jack Black acquisition | — | — | % | 17.1 | 0.8 | % | |||||||||||||||||
| Impact of currency | (7.5) | (0.3) | % | (32.6) | (1.6) | % | |||||||||||||||||
| Net sales - current year | $ | 1,949.7 | (8.9) | % | $ | 2,141.0 | (4.2) | % | |||||||||||||||
For fiscal 2020, net sales decreased 8.9% on a reported basis. Excluding the impact of the Cremo acquisition, the divestiture of the Infant and Pet Care business and currency movements, organic net sales decreased 4.4% versus the prior year. The decline in organic net sales in fiscal 2020 was largely due to the ongoing COVID-19 pandemic and the related stay-at-home orders and travel restrictions which resulted in lower consumer demand and decreases in net sales for our Wet Shave and Sun Care products. Organic net sales declined in North America by 2.4% while International organic net sales fell 7.6%. Globally, declines related to COVID-19 were primarily in Wet Shave and Sun Care while Skin Care grew, driven by Wet Ones. Feminine Care had decreased volumes during fiscal 2020, driven by distribution declines and increased competitive pressures.
Management estimates that the negative impact to net sales due to COVID-19 was approximately $102, and when excluding this impact, organic net sales increased 0.5% compared to the prior year. Management estimated the impact of the COVID-19 pandemic on net sales at the product and category level, through a detailed analysis of many factors, including rolling weekly and monthly net sales trends prior to COVID-19, historical and current order patterns by customer compared to the prior year period and segment performance in the context of overall category trends. This is the Company’s best estimate and there can be no assurance that our estimate reflects the actual COVID-19 impact to net sales.
For further discussion regarding net sales, including a summary of reported versus organic changes, see “Segment Results.”
Gross Profit
Gross profit was $880.9 in fiscal 2020, as compared to $966.6 in fiscal 2019. Gross margin as a percent of net sales for fiscal 2020 was 45.2%, up 10 basis points as compared to fiscal 2019. Excluding the impact of acquisitions, divestitures, and non-recurring charges such as COVID-19 pandemic expenses and Project Fuel obsolescence, gross margin as a percent of sales increased by 10 basis points compared to fiscal 2019, as Project Fuel related savings and lower input costs helped to offset the impact of lower volumes, and higher pricing in Sun Care offset unfavorable mix in Wet Shave.
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Selling, General and Administrative Expense
SG&A was $408.8 in fiscal 2020, or 21.0% of net sales, as compared to $372.0 in fiscal 2019, or 17.4% of net sales. Excluding the impact of non-recurring expenses, consisting of Cremo acquisition and integration costs, the divestiture of Infant and Pet Care, Project Fuel and Feminine and Infant Care evaluation costs in both periods, SG&A as a percent of net sales increased 150 basis points compared to fiscal 2019. The increase in SG&A spend was driven by higher bad debt expense driven by the COVID-19 pandemic and increased salary and benefits expense compared to the prior fiscal year.
Advertising and Sales Promotion Expense
For fiscal 2020, A&P was $216.2, down $34.7 as compared to fiscal 2019. A&P as a percent of net sales was 11.1% for fiscal 2020, compared with 11.7% in fiscal 2019. The decrease was driven by lower spend across all segments. Wet Shave spend in fiscal 2020 was down across all product groups and geographies. Additionally, Feminine Care A&P in North America declined in fiscal 2020. The decline in A&P was primarily caused by the COVID-19 pandemic, as the Company lowered A&P in fiscal 2020 due to the reduction in demand across multiple product lines. Additionally, A&P declined by $7.5 due to the sale of the Infant and Pet Care business.
Research and Development Expense
Research and development expense (“R&D”) increased to $55.3 in fiscal 2020, compared to $53.5 in fiscal 2019. As a percent of net sales, R&D was approximately 2.8% in fiscal 2020 compared to 2.5% in fiscal 2019.
Interest Expense Associated with Debt
Interest expense associated with debt for fiscal 2020 was $61.2, a decrease of $1.4 as compared to fiscal 2019. The decline in interest expense was the result of lower average outstanding debt, primarily as a result of the repayment of the $185 term loan due April 2019 in the second quarter of fiscal 2019. Additionally, there were no borrowings under the Revolving Credit Facility as of September 30, 2020.
In addition to the interest expense associated with debt, we incurred $26.2 of costs for the early retirement of the $600 2021 Notes in fiscal 2020.
Other Expense (Income), Net
Other expense (income), net was expense of $5.4 in fiscal 2020 compared to expense of $1.5 in fiscal 2019. The increase in expense in fiscal 2020 was largely related to the significant devaluation of local currencies in several key countries in Latin America, Asia and Central Europe against the U.S. dollar in the second quarter and the resulting revaluation of balance sheet exposures, partially offset by foreign currency exchange contract gains.
Income Tax Provision (Benefit)
Income taxes, which include federal, state and foreign taxes, were 22.6%, 4.6% and 36.9% of Earnings (loss) before income taxes in fiscal 2020, 2019 and 2018, respectively.
The effective income tax rate for fiscal 2020 for operations was 22.6% as compared to 4.6% in the prior year. The fiscal 2019 effective tax rate reflects a small benefit on a net loss, due to the impairment of goodwill and intangible assets, a portion of which are non-deductible. Excluding impairment charges, restructuring charges, acquisition and integration costs, cost of early debt retirement, COVID-19 pandemic expenses, advisory expenses in connection with the evaluation of the Feminine and Infant Care businesses, Sun Care reformulation costs, pension settlement expense, investor settlement expenses, the disposition of the Infant and Pet Care business and the Playtex gloves assets and the impact of the Tax Act, the adjusted effective tax rate for fiscal 2020 was 22.5% compared to 23.8% in the prior year.
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| 2020 | |||||||||||||||||
| Reported | Adjustments |
Adjusted
(Non-GAAP) |
|||||||||||||||
| Earnings before income taxes | $ | 87.3 | $ | 104.6 | $ | 191.9 | |||||||||||
| Income tax provision | 19.7 | 23.4 | 43.1 | ||||||||||||||
| Net earnings | $ | 67.6 | $ | 81.2 | $ | 148.8 | |||||||||||
| Effective tax rate | 22.6 | % | 22.5 | % | |||||||||||||
| 2019 | |||||||||||||||||
| Reported | Adjustments |
Adjusted
(Non-GAAP) |
|||||||||||||||
| (Loss) earnings before income taxes | $ | (390.3) | $ | 638.1 | $ | 247.8 | |||||||||||
| Income tax (benefit) provision | (18.1) | 77.1 | 59.0 | ||||||||||||||
| Net (loss) earnings | $ | (372.2) | $ | 561.0 | $ | 188.8 | |||||||||||
| Effective tax rate | 4.6 | % | 23.8 | % | |||||||||||||
| 2018 | |||||||||||||||||
| Reported | Adjustments |
Adjusted
(Non-GAAP) |
|||||||||||||||
| Earnings before income taxes | $ | 163.8 | $ | 84.9 | $ | 248.7 | |||||||||||
| Income tax provision | 60.5 | (3.4) | 57.1 | ||||||||||||||
| Net earnings | $ | 103.3 | $ | 88.3 | $ | 191.6 | |||||||||||
| Effective tax rate | 36.9 | % | 23.0 | % | |||||||||||||
Our effective tax rate is highly sensitive to the mix of countries from which earnings or losses are derived. Declines in earnings in lower tax rate jurisdictions, earnings increases in higher tax rate jurisdictions, repatriation of foreign earnings or operating losses in the future could increase future tax rates. Additionally, adjustments to prior year tax provision estimates could increase or decrease future tax provisions.
Segment Results
Segment performance is evaluated based on segment profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with impairment charges, restructuring charges, acquisition and integration costs, cost of early debt retirement, COVID-19 pandemic expenses, advisory expenses in connection with the evaluation of the Feminine and Infant Care businesses, Sun Care reformulation costs, investor settlement expenses, the disposition of the Infant and Pet Care business and the Playtex gloves assets and the amortization and impairment of intangible assets. Financial items, such as interest income and expense, are managed on a global basis at the corporate level. The exclusion of such charges from segment results reflects management’s view on how it evaluates segment performance.
Our operating model includes some shared business functions across the segments, including product warehousing and distribution, transaction processing functions and, in most cases, a combined sales force and management teams. We apply a fully allocated cost basis, in which shared business functions are allocated between the segments on a percentage of net sales basis. Such allocations are estimates and do not represent the costs of such services if performed on a stand-alone basis.
The following tables present changes in segment net sales and segment profit for fiscal 2020 and 2019, as compared to the corresponding prior year periods, and also provide a reconciliation of organic segment net sales and organic segment profit to reported amounts. For a reconciliation of Segment profit to Earnings (loss) before income taxes, see Note 18 of Notes to Consolidated Financial Statements.
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Wet Shave
| Net Sales - Wet Shave | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 1,250.1 | $ | 1,330.1 | |||||||||||||||||||
| Organic | (83.2) | (6.7) | % | (54.7) | (4.1) | % | |||||||||||||||||
| Impact of currency | (4.6) | (0.3) | % | (25.3) | (1.9) | % | |||||||||||||||||
| Net sales - current year | $ | 1,162.3 | (7.0) | % | $ | 1,250.1 | (6.0) | % | |||||||||||||||
Wet Shave net sales for fiscal 2020 decreased 7.0%, inclusive of a 0.3% decline due to currency movements. Excluding the impact of currency movements, organic net sales decreased $83.2, or 6.7%, primarily driven by significantly lower volumes and unfavorable price mix. The decline in organic net sales was driven by a reduction in category sales and demand from the COVID-19 pandemic, impacting all regions. Volumes declined in Men’s Systems and Disposables, partially offset by slight growth in volumes in Women’s systems. Geographically, the decline in organic sales was driven by North America, which fell 6.1% due to lower volumes in Men’s Systems and Disposables and an unfavorable price mix across all product categories. International Wet Shave declined organically by 7.1%, primarily in Asia Pacific and Europe which was driven by volume declines in Men’s Systems and Disposables.
| Segment Profit - Wet Shave | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Segment profit - prior year | $ | 246.5 | $ | 265.2 | |||||||||||||||||||
| Organic | (37.9) | (15.4) | % | (13.4) | (5.1) | % | |||||||||||||||||
| Impact of currency | (2.4) | (0.9) | % | (5.3) | (2.0) | % | |||||||||||||||||
| Segment profit - current year | $ | 206.2 | (16.3) | % | $ | 246.5 | (7.1) | % | |||||||||||||||
Wet Shave segment profit for fiscal 2020 was $206.2, down $40.3 or 16.3%, inclusive of the impact of currency movements. Excluding the impact of currency movements, organic segment profit decreased $37.9, or 15.4%. The decline in segment profit was the result of lower gross margins that were impacted by decreased volumes across all regions in Men’s Systems and Disposables, unfavorable price mix in Men’s and Women’s Systems and increased SG&A spend, offset by favorable cost mix and A&P. Segment profit was significantly impacted by the COVID-19 pandemic, which reduced demand and volumes of Wet Shave products, and was partially offset by the reduction in A&P.
Sun and Skin Care
| Net Sales - Sun and Skin Care | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 463.1 | $ | 453.3 | |||||||||||||||||||
| Organic | (3.1) | (0.7) | % | (0.4) | (0.1) | % | |||||||||||||||||
| Impact of Cremo acquisition | 4.5 | 1.0 | % | — | — | % | |||||||||||||||||
| Impact of Playtex gloves asset sale | — | — | % | (1.0) | (0.2) | % | |||||||||||||||||
| Impact of Jack Black acquisition | — | — | % | 17.1 | 3.8 | % | |||||||||||||||||
| Impact of currency | (2.5) | (0.5) | % | (5.9) | (1.4) | % | |||||||||||||||||
| Net sales - current year | $ | 462.0 | (0.2) | % | $ | 463.1 | 2.1 | % | |||||||||||||||
Sun and Skin Care net sales for fiscal 2020 decreased 0.2%, inclusive of a 1.0% increase from the Cremo acquisition and a 0.5% decline due to currency movements. Excluding the impact of acquisitions and currency movements, organic net sales decreased $3.1, primarily due to declines in Banana Boat and Hawaiian Tropic, as the COVID-19 pandemic resulted in travel disruption during the summer vacation season, significantly reducing demand during the peak Sun Care season. This decline was partially offset by growth in Wet One’s hand wipes and Men’s grooming, with volume growth for both Bulldog and Jack Black. Geographically, North America grew organic net sales 3.2%, driven by Wet Ones, which saw more than 60% growth due to demand increases largely attributable to the COVID-19 pandemic. Internationally, organic net sales fell almost 11%, driven by declines in Sun Care volumes in Asia Pacific and Latin America.
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| Segment Profit - Sun and Skin Care | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Segment profit - prior year | $ | 80.4 | $ | 80.9 | |||||||||||||||||||
| Organic | (11.7) | (14.6) | % | (4.8) | (5.9) | % | |||||||||||||||||
| Impact of Cremo acquisition | 1.1 | 1.4 | % | — | — | % | |||||||||||||||||
| Impact of Playtex gloves asset sale | — | — | % | (0.3) | (0.4) | % | |||||||||||||||||
| Impact of Jack Black acquisition | — | — | % | 5.3 | 6.6 | % | |||||||||||||||||
| Impact of currency | (0.7) | (0.8) | % | (0.7) | (0.8) | % | |||||||||||||||||
| Segment profit - current year | $ | 69.1 | (14.0) | % | $ | 80.4 | (0.5) | % | |||||||||||||||
Sun and Skin Care segment profit for fiscal 2020 was $69.1, a decrease of 14.0% compared to the prior year, inclusive of a 1.4% increase from the Cremo acquisition and a 0.8% decline from currency movements. Excluding the impact of the acquisition and currency movements, organic segment profit decreased $11.7, or 14.6%. The decrease in segment profit was driven by product mix as lower net sales and gross margin in Sun Care from reduced volumes was partially offset by increased volumes in Wet Ones and Men’s Grooming products. Declines in A&P in Sun Care were offset by higher overall segment SG&A.
Feminine Care
| Net Sales - Feminine Care | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 308.1 | $ | 329.5 | |||||||||||||||||||
| Organic | (9.1) | (3.0) | % | (20.7) | (6.3) | % | |||||||||||||||||
| Impact of currency | (0.4) | (0.1) | % | (0.7) | (0.2) | % | |||||||||||||||||
| Net sales - current year | $ | 298.6 | (3.1) | % | $ | 308.1 | (6.5) | % | |||||||||||||||
Feminine Care net sales for fiscal 2020 decreased $9.5, or 3.1%, inclusive of a 0.1% decline due to currency movements. Excluding the impact of currency movements, organic segment net sales decreased $9.1, or 3.0%, driven by volume declines across branded tampons and Carefree liners. Pads had volume growth during fiscal 2020 with the introduction of Carefree pads more than offsetting volume declines in Stayfree. The COVID-19 pandemic was a net positive as pantry loading in the second quarter of fiscal 2020 caused increased volumes, partially offset by lower net sales during the remainder of fiscal 2020.
| Segment Profit - Feminine Care | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Segment profit - prior year | $ | 48.3 | $ | 37.2 | |||||||||||||||||||
| Organic | 4.1 | 8.5 | % | 11.5 | 30.9 | % | |||||||||||||||||
| Impact of currency | (0.1) | (0.2) | % | (0.4) | (1.1) | % | |||||||||||||||||
| Segment profit - current year | $ | 52.3 | 8.3 | % | $ | 48.3 | 29.8 | % | |||||||||||||||
Feminine Care segment profit for fiscal 2020 was $52.3, an increase of $4.0, or 8.3%, inclusive of currency impacts. The increase in segment profit is primarily the result of lower A&P and favorable cost mix from manufacturing efficiencies, partially offset by lower volumes and higher SG&A.
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All Other
| Net Sales - All Other | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 119.7 | $ | 121.5 | |||||||||||||||||||
| Organic | 0.5 | 0.4 | % | (1.1) | (0.9) | % | |||||||||||||||||
| Impact of Infant and Pet Care business sale | (93.4) | (78.0) | % | — | — | % | |||||||||||||||||
| Impact of currency | — | — | % | (0.7) | (0.6) | % | |||||||||||||||||
| Net sales - current year | $ | 26.8 | (77.6) | % | $ | 119.7 | (1.5) | % | |||||||||||||||
All Other net sales for fiscal 2020 decreased 77.6%. Excluding the impact of the divestiture of the Infant and Pet Care business, organic net sales increased $0.5 or 0.4%.
| Segment Profit - All Other | |||||||||||||||||||||||
| For the Years Ended September 30, | |||||||||||||||||||||||
| 2020 | %Chg | 2019 | %Chg | ||||||||||||||||||||
| Segment profit - prior year | $ | 11.7 | $ | 18.5 | |||||||||||||||||||
| Organic | 0.5 | 4.3 | % | (6.4) | (34.6) | % | |||||||||||||||||
| Impact of Infant and Pet Care business sale | (9.1) | (77.8) | % | — | — | % | |||||||||||||||||
| Impact of currency | — | — | % | (0.4) | (2.2) | % | |||||||||||||||||
| Segment profit - current year | $ | 3.1 | (73.5) | % | $ | 11.7 | (36.8) | % | |||||||||||||||
All Other segment profit for fiscal 2020 decreased 73.5% compared to the prior year period. Excluding the impact of the divestiture of the Infant and Pet Care business, organic segment profit increased 4.3%.
General Corporate and Other Expenses
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| General corporate and other expenses | $ | 54.9 | $ | 57.3 | $ | 68.8 | |||||||||||
| Impairment charges | — | 570.0 | 24.4 | ||||||||||||||
| Restructuring and related costs | 38.1 | 55.6 | 39.9 | ||||||||||||||
| Acquisition and integration planning costs | 39.8 | 6.7 | 5.2 | ||||||||||||||
| Cost of early retirement of long-term debt | 26.2 | — | — | ||||||||||||||
| Gain on sale of Infant and Pet Care business | (4.1) | — | — | ||||||||||||||
| COVID-19 expenses | 4.3 | — | — | ||||||||||||||
| Sun Care reformulation costs | — | 2.8 | 25.3 | ||||||||||||||
| Feminine and Infant Care evaluation costs | 0.3 | 2.1 | — | ||||||||||||||
| Investor settlement expense | — | 0.9 | — | ||||||||||||||
| Gain on sale of Playtex gloves assets | — | — | (15.3) | ||||||||||||||
| Pension settlement expense | — | — | 5.4 | ||||||||||||||
| General corporate and other expenses | $ | 159.5 | $ | 695.4 | $ | 153.7 | |||||||||||
| % of net sales | 8.2 | % | 32.5 | % | 6.9 | % | |||||||||||
For fiscal 2020, general corporate expenses were $54.9, a decrease of $2.4 as compared to fiscal 2019. Fiscal 2019 general corporate expenses decreased $11.5 when compared to fiscal 2018. The decline in general corporate expenses in fiscal 2020 relates to savings from Project Fuel and reduced consulting and legal fees, offset by a slight increase in salary and benefit costs and incentive compensation expense.
The Company incurred expenses associated with the early retirement of the $600 Senior Notes due 2021, including the recognition of remaining debt issuance costs and interest expense in the third quarter of fiscal 2020. Additionally, the Company incurred expenses, primarily legal, consulting and financing costs, associated with the termination of the Harry’s acquisition in the first half of fiscal 2020. Acquisition and integration costs incurred in the fourth quarter of fiscal 2020 were related to the acquisition of Cremo, which was completed in September 2020.
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Liquidity and Capital Resources
To date, COVID-19 has not had a significant impact on our liquidity or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
At September 30, 2020, a portion of our cash balances were located outside the U.S. Given our extensive international operations, a significant portion of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We generally repatriate a portion of current year earnings from select non-U.S. subsidiaries only if the economic cost of the repatriation is not considered material.
The counterparties to deposits consist of a number of major financial institutions. We consistently monitor positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies.
Our total borrowings were $1,271.1 at September 30, 2020, including $21.1 tied to variable interest rates. Our total borrowings at September 30, 2019 were $1,231.4.
On May 22, 2020, the Company entered into a new unsecured indenture agreement for 5.5% Senior Notes in the amount of $750 due June 1, 2028 (“2028 Notes”). The Company used a portion of the net proceeds of the 2028 Notes to satisfy and discharge the obligations outstanding for the $600 Senior Notes due 2021 (“2021 Notes”). The remainder of the net proceeds will be used to pay our fees and expenses and for general corporate purposes, which may include, but are not limited to, the repayment of outstanding indebtedness, working capital, capital expenditures and acquisitions. The Company’s $500 Senior Notes are due May 24, 2022. We expect to refinance these notes prior to their maturity.
On April 3, 2020, we replaced our former unsecured revolving credit facility in the U.S. with a new secured revolving credit facility in an aggregate principal amount of $425 (the “Revolving Credit Facility”). Taking into account outstanding letters of credit of $8.7, as of September 30, 2020, $416.3 was available under the Revolving Credit Facility. At September 30, 2019, we had outstanding borrowings of $117.0 under our prior senior unsecured revolving credit agreement dated as of June 1, 2015, as amended, supplemented or modified from time to time among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties thereto, and the related Subsidiary Guaranty Agreement dated as of June 30, 2015 (the “Prior Revolving Facility” and, collectively with the Revolving Credit Facility, the “Revolving Credit Facilities”).
We had outstanding international borrowings, recorded within Notes payable, of $21.1 and $14.4 as of September 30, 2020 and September 30, 2019, respectively.
Historically, we have generated and expect to continue to generate positive cash flows from operations. Our cash flows are affected by the seasonality of our Sun Care products, typically resulting in higher net sales and increased cash generated in the second and third quarter of each fiscal year. While we cannot reasonably estimate the full impact COVID-19 will have on our cash flows, we believe our cash on hand, cash flows from operations, additional proceeds from the 2028 Notes and available borrowing under the Revolving Credit Facility will be sufficient to satisfy our future working capital requirements, interest payments, research and development activities, capital expenditures, and other financing requirements for at least the next 12 months. We will continue to monitor our cash flows, spending and liquidity needs.
Short-term financing needs primarily consist of working capital requirements, and principal and interest payments on our long-term debt. Long-term financing needs will depend largely on potential growth opportunities, including acquisition activity and repayment or refinancing of our long-term debt obligations. We may, from time-to-time, seek to repurchase shares of our common stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Our long-term liquidity may be influenced by our ability to borrow additional funds, renegotiate existing debt, and raise equity under terms that are favorable to us.
In fiscal 2021, we expect our total capital expenditures to be in the range of $60 to $70 primarily related to maintenance of manufacturing facilities, new products and information technology system enhancements. While we intend to fund these capital expenditures with cash generated from operations, we may also utilize our borrowing facilities.
During fiscal 2020, we contributed $6.6 to our pension and postretirement plans. The expected minimum required contribution to our pension and postretirement plans in fiscal 2021 is $6.3; however, discretionary contributions may be made.
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Debt Covenants
The Revolving Credit Facility governing our outstanding debt at September 30, 2020 contains certain customary representations and warranties, financial covenants, covenants restricting our ability to take certain actions, affirmative covenants and provisions relating to events of default. Under the terms of the Revolving Credit Facility, the ratio of our indebtedness to our earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the agreement and detailed below, cannot be greater than 4.0 to 1. In addition, under the Revolving Credit Facility, the ratio of our EBITDA, as defined in the Revolving Credit Facility, to total interest expense must exceed 3.0 to 1. Under the Revolving Credit Facility, EBITDA is defined as net earnings, as adjusted to add-back interest expense, income taxes, depreciation and amortization, all of which are determined in accordance with GAAP. In addition, the Revolving Credit Facility allows certain non-cash charges such as stock award amortization and asset write-offs including, but not limited to, impairment and accelerated depreciation, and operating expense reductions or synergies to be “added-back” in determining EBITDA for purposes of the indebtedness ratio. Total debt and interest expense are calculated in accordance with GAAP. If we fail to comply with these covenants or with other requirements of the Revolving Credit Facility, the lenders may have the right to accelerate the maturity of the debt. Acceleration under one of our facilities would trigger cross-defaults on our other borrowings.
As of September 30, 2020, we were in compliance with the provisions and covenants associated with the Revolving Credit Facility.
Cash Flows
A summary of our cash flow from operating, investing and financing activities is provided in the following table:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net cash from (used by): | |||||||||||||||||
| Operating activities | $ | 232.6 | $ | 190.6 | $ | 259.4 | |||||||||||
| Investing activities | (196.4) | (45.5) | (118.8) | ||||||||||||||
| Financing activities | (18.7) | (63.8) | (379.6) | ||||||||||||||
| Effect of exchange rate changes on cash | 5.6 | (6.1) | 2.5 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 23.1 | $ | 75.2 | $ | (236.5) | |||||||||||
Operating Activities
Cash flow from operating activities was $232.6 in fiscal 2020, as compared to $190.6 in fiscal 2019. The increase in operating cash flow in fiscal 2020 was driven by working capital improvements, including lower accounts receivables due to improved days in sales outstanding and lower net sales, reduced inventory balances, offset by a decrease in accounts payable days outstanding.
Investing Activities
Cash flow used by investing activities was $196.4 in fiscal 2020 as compared to $45.5 in the prior fiscal year. The change was primarily due to the $233.6 acquisition of Cremo in the fourth quarter of fiscal 2020, a $13.8 outflow related to a minority investment of a direct-to-consumer company, offset by a $95.8 inflow related to the sale of the Infant and Pet Care business in the first quarter of fiscal 2020. Capital expenditures were $47.7 during fiscal 2020 and $58.0 during the prior year.
Financing Activities
Net cash used by financing activities was $18.7 in fiscal 2020 as compared to $63.8 in fiscal 2019. During fiscal 2020, we made repayments of $117.0 on the Prior Revolving Facility. The Company also replaced its 2021 Senior Notes with the issuance 2028 Senior Notes. Additional financing cash outflows incurred during fiscal 2020 included the payment of costs incurred in connection with the early retirement of the 2021 Notes totaling $26.2 and debt issuance costs totaling $11.7 related to the issuance of the 2028 Notes. Financing outflows associated with the Company’s $150 uncommitted accounts receivable facility (“Accounts Receivable Facility”) were $11.2 during fiscal 2020 compared to financing inflows of $8.4 in the prior year period. Refer to Note 10 in the Notes to Consolidated Financial Statements for further discussion on the Accounts Receivable Facility.
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Share Repurchases
In January 2018, our Board approved an authorization to repurchase up to 10.0 shares of our common stock. This authorization replaced a prior share repurchase authorization from May 2015. We have 10.0 shares remaining available for purchase under the January 2018 Board authorization. Any future share repurchases may be made in the open market, privately negotiated transactions or otherwise, in such amounts and at such times as we deem appropriate based upon prevailing market conditions, business needs and other factors.
During fiscal 2020, 0.1 shares were purchased related to the surrender of shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock equivalent awards.
Dividends
On November 20, 2020, our Board declared a cash dividend of $0.15 per share of common stock, payable on January 6, 2021, to all shareholders of record as of the close of business on December 10, 2020.
Inflation
Management recognizes that inflationary pressures may have an adverse effect on our company through higher material, labor and transportation costs, asset replacement costs and related depreciation, healthcare and other costs. In general, we have been able to offset or minimize inflation effects through a variety of methods including pricing actions, cost reductions and productivity improvements. We can provide no assurance that such mitigation will be available in the future.
Seasonality
Customer orders for sun care products within our Sun and Skin Care segment are highly seasonal. This has historically resulted in higher sun care sales to retailers during the late winter through mid-summer months. Within our Wet Shave segment, sales of women’s products are moderately seasonal, with increased consumer demand in the spring and summer months. See “Our business is subject to seasonal volatility” in Item 1A. Risk Factors.
Foreign Currency
Certain net sales and costs of our international operations are denominated in the local currency of the respective countries. As such, sales and profits from these subsidiaries may be impacted by fluctuations in the value of these local currencies relative to the U.S. dollar. We also have significant intercompany financing arrangements that may result in gains and losses in our results of operations. In an effort to mitigate the impact of currency exchange rate effects, we may hedge certain operational and intercompany transactions; however, our hedging strategies may not fully offset gains and losses recognized in our results of operations.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit,” and on March 29, 2017, the U.K. began the process to withdraw from the E.U. Volatility in exchange rates is expected to continue as the U.K. negotiates its exit from the E.U. Historically, our hedging strategy has included hedging a portion of our exposure to the British pound, thereby reducing our currency risk. We routinely monitor and evaluate this strategy based on risk and will adjust as necessary to minimize exposure to fluctuations in exchange rates related to our U.K. operations. A weaker British pound as compared to the U.S. dollar during a reporting period causes the local currency results of our U.K. operations to be translated into fewer U.S. dollars. For fiscal 2020, net sales of our U.K. operations were 4% of our consolidated net sales. Future impacts on our U.K. operations and financial results will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.
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Commitments and Contingencies
Contractual Obligations
A summary of our significant contractual obligations at September 30, 2020 is shown below:
| Total |
Less than 1
year |
1-3 years | 3-5 years |
More than 5
years |
|||||||||||||||||||||||||
| Long-term debt, including current maturities | $ | 1,250.0 | — | 500.0 | — | 750.0 | |||||||||||||||||||||||
| Interest on long-term debt | 379.1 | 65.2 | 148.7 | 82.7 | 82.5 | ||||||||||||||||||||||||
| Notes payable | 21.1 | 21.1 | — | — | — | ||||||||||||||||||||||||
|
Minimum pension funding (1)
|
17.9 | 6.3 | 2.3 | 9.3 | — | ||||||||||||||||||||||||
| Operating leases | 69.8 | 10.2 | 14.2 | 9.5 | 35.9 | ||||||||||||||||||||||||
|
Purchase obligations and other (2) (3)
|
69.2 | 43.7 | 16.1 | 7.0 | 2.4 | ||||||||||||||||||||||||
| Total | $ | 1,807.1 | $ | 146.5 | $ | 681.3 | $ | 108.5 | $ | 870.8 | |||||||||||||||||||
(1)Globally, our total pension and post retirement contributions in the next 12 months are estimated to be approximately $6.3. U.S. pension plans constitute approximately 70% of the plan assets for our pension plans. The estimates beyond fiscal 2020 represent future pension payments to comply with local funding requirements in the U.S. only. The projected payments beyond fiscal 2023 are not currently determinable.
(2)Included in the table above are approximately $32.6 of fixed costs related to third-party logistics contracts.
(3)Included in the table above are approximately $5.9 of deferred compensation payments to retirees.
Purchase obligations set forth in the table above represent contractual obligations that generally have longer terms and are non-routine in nature. We are also party to various service and supply contracts that generally extend one to three months. These arrangements are primarily individual, short-term purchase orders for routine goods and services at market prices, which are part of our normal operations and are reflected in historical operating cash flow trends. These contracts can generally be canceled at our option at any time. We do not believe such arrangements will adversely affect our liquidity position. In addition, we have various commitments related to service and supply contracts that contain penalty provisions for early termination. Because of the short period between order and shipment date (generally less than one month) for most of our orders, the dollar amount of current backlog is not material and is not considered to be a reliable indicator of future sales volume. Generally, sales to our top customers are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them. As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time. As of September 30, 2020, we do not believe such purchase arrangements or termination penalties will have a significant effect on our results of operations, financial position or liquidity position in the future. As such, these arrangements have been excluded from the table above.
Environmental Matters
Our operations, like those of other companies, are subject to various federal, state, foreign and local laws and regulations intended to protect public health and the environment. These regulations relate primarily to worker safety, air and water quality, underground fuel storage tanks and waste handling and disposal. Accrued environmental costs at September 30, 2020 were $11.6. It is difficult to quantify with reasonable certainty the cost of environmental matters, particularly remediation and future capital expenditures for environmental control equipment. Total environmental capital expenditures and operating expenses are not expected to have a material effect on our total capital and operating expenditures, consolidated earnings or competitive position. However, current environmental spending estimates could be modified as a result of changes in our plans or our understanding of underlying facts, changes in legal requirements, including any requirements related to global climate change, or other factors.
Supplemental Guarantor Financial Information
The Company issued Senior Notes in May 2012, which are fully and unconditionally guaranteed on a joint and several basis by the Company’s existing and future material direct and indirect domestic subsidiaries that are guarantors of any the Company’s credit agreements or other indebtedness for borrowed money (the “Guarantors”). The Guarantors are 100% owned either directly or indirectly by the Company and jointly and severally guarantee the Company’s obligations under the Notes. The Company’s subsidiaries organized outside of the U.S. and certain domestic subsidiaries which are not guarantors of any of the Company’s other indebtedness (collectively, the “Non-Guarantors”), do not guarantee the Notes. The subsidiary guarantee with respect to the Notes is subject to release upon sale of all of the capital stock of the subsidiary guarantor; if the guarantee under the Company’s credit agreements and other indebtedness for borrowed money is released or discharged (other than due to payment under such guarantee); or when the requirements for legal defeasance are satisfied or the obligations are discharged in accordance with the indenture.
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The following tables present summarized financial information for Edgewell Personal Care Company (the “Parent”) and the Guarantors on a combined basis after elimination of (i) intercompany transactions and balances among the Parent and the Guarantors and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor.
| Summarized Statement of Operations | Twelve Months Ended September 30, 2020 | ||||
| Net sales | $ | 1,305.6 | |||
| Gross profit | 521.8 | ||||
| Net loss | (27.9) | ||||
| Summarized Balance Sheet | September 30, 2020 | September 30, 2019 | |||||||||
| Assets | |||||||||||
| Current assets | $ | 419.1 | $ | 299.1 | |||||||
| Non-current assets | 1,947.4 | 1,745.5 | |||||||||
| Liabilities and Shareholder’s Equity | |||||||||||
| Current liabilities | 283.4 | 487.5 | |||||||||
| Non-current liabilities | 1,517.1 | 1,393.2 | |||||||||
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Specific areas, among others, requiring the application of management’s estimates and judgment include assumptions pertaining to accruals for consumer and trade promotion programs, pension and postretirement benefit costs, share-based compensation, future cash flows associated with impairment testing of goodwill and other long-lived assets, uncertain tax positions, the reinvestment of undistributed foreign earnings and tax valuation allowances. On an ongoing basis, we evaluate our estimates, but actual results could differ materially from those estimates.
Our most critical accounting policies are revenue recognition, pension and other postretirement benefits, the valuation of long-lived assets (including property, plant and equipment), income taxes (including uncertain tax positions) and the carrying value of intangible assets (and the related impairment testing of goodwill and other indefinite-lived intangible assets). A summary of our significant accounting policies is contained in Note 2 of Notes to Consolidated Financial Statements. This listing is not intended to be a comprehensive list of all of our accounting policies.
Revenue Recognition
We derive revenue from the sale of our products. Revenue is recognized when the customer obtains control of the goods, which occurs when the ability to use and obtain benefits from the goods are passed to the customer, most commonly upon the delivery of goods to the customer. Discounts are offered to customers for early payment, and an estimate of the discounts is recorded as a reduction of Net sales in the same period as the sale. Our standard sales terms are final and returns or exchanges are not permitted with the exception of end of season returns for Sun Care products. Reserves are established and recorded in cases where the right of return does exist for a particular sale.
We assess the contractual obligations in customers’ purchase orders and identify performance obligations related to the transferred goods (or a bundle of goods) that are distinct. To identify the performance obligations, we consider all the goods promised, whether explicitly stated or implied based on customary business practices. Our purchase orders are short term in nature, lasting less than one year, and contain a single delivery element. For a purchase order that has more than one performance obligation, we allocate the total consideration to each distinct performance obligation on a relative stand-alone selling price basis. We do not exclude variable consideration in determining the remaining value of performance obligations.
We record sales at the time that control of goods passes to the customer. The terms of these sales vary, but, in all instances, the following conditions are met: (1) the sales arrangement is evidenced by purchase orders submitted by customers; (2) the selling price is fixed or determinable; (3) title to the product has transferred; (4) there is an obligation to pay at a specified date without
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any additional conditions or actions required by us; and (5) collectability is reasonably assured. Simultaneously with the sale, we reduce Net sales and Cost of products sold and reserve amounts on the Consolidated Balance Sheet for anticipated returns based upon an estimated return level in accordance with GAAP. Customers are required to pay for the Sun Care product purchased during the season under the required terms. Under certain circumstances, we allow customers to return Sun Care products that have not been sold by the end of the Sun Care season, which is normal practice in the Sun Care industry. The timing of returns of Sun Care products can vary in different regions, based on climate and other factors. However, the majority of returns occur in the U.S. from September through January, following the summer Sun Care season. We estimate the level of Sun Care returns as the Sun Care season progresses, using a variety of inputs including historical experience, consumption trends during the Sun Care season, obsolescence factors including expiration dates and inventory positions at key retailers. We monitor shipment activity and inventory levels at key retailers during the season in an effort to more accurately estimate potential returns.
This allows us to manage shipment activity to our customers, especially in the latter stages of the Sun Care season, to reduce the potential for returned product. The level of returns may fluctuate from our estimates due to several factors, including weather conditions, customer inventory levels and competitive activity. Based on our fiscal 2020 Sun Care shipments, each percentage point change in our returns rate would have impacted our reported net sales by $2.7 and our reported operating income by $2.6. At September 30, 2020 and 2019, our reserve on the Consolidated Balance Sheet for returns was $44.8 and $60.4, respectively.
We offer a variety of programs, primarily to our retail customers, designed to promote sales of our products. Such programs require periodic payments and allowances based on estimated results of specific programs and are recorded as a reduction to net sales. We accrue, at the time of sale, the estimated total payments and allowances associated with each transaction. Additionally, we offer programs directly to consumers to promote the sale of our products. Promotions which reduce the ultimate consumer sale prices are recorded as a reduction of net sales at the time the promotional offer is made, generally using estimated redemption and participation levels. Taxes we collect on behalf of governmental authorities, which are generally included in the price to the customer, are also recorded as a reduction of net sales.
We continually assess the adequacy of accruals for customer and consumer promotional program costs not yet paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these adjustments have not been material to annual results.
Pension Plans and Other Postretirement Benefits
The determination of our obligation and expense for pension and other postretirement benefits is dependent on certain assumptions developed by us and used by actuaries in calculating such amounts. Assumptions include, among others, the discount rate, the expected long-term rate of return on plan assets, and future salary increases, where applicable. Actual results that differ from assumptions made are recognized on the balance sheet and subsequently amortized to earnings over future periods. Significant differences in actual experience or significant changes in macroeconomic conditions resulting in changes to assumptions may materially affect pension and other postretirement obligations. In determining the discount rate, we use the yield on high-quality bonds that coincide with the cash flows of our plans’ estimated payouts. For the U.S. plans, which represent our most significant obligations, we consider the Mercer yield curve in determining the discount rates.
We utilize a spot discount rate approach to estimate service and interest components of net periodic benefit cost for our pension benefits. The spot discount rate approach applies the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows and is a more precise application of the yield curve spot rates used in the traditional single discount rate approach.
Of the assumptions listed above, changes in the expected long-term rate of return on plan assets and changes in the discount rate used in developing plan obligations will likely have the most significant impact on our annual earnings, prospectively. Based on plan assets at September 30, 2020, a one percentage point decrease or increase in expected asset returns would increase or decrease our pension expense by approximately $4.9. In addition, it may increase and accelerate the rate of required pension contributions in the future. Uncertainty related to economic markets and the availability of credit may produce changes in the yields on corporate bonds rated as high-quality. As a result, discount rates based on high-quality corporate bonds may increase or decrease, leading to lower or higher, respectively, pension obligations. A one percentage point decrease in the discount rate would increase pension obligations by approximately $93.9 at September 30, 2020.
As allowed under GAAP, our U.S. qualified pension plan uses market related value, which recognizes market appreciation or depreciation in the portfolio over five years, thereby reducing the short-term impact of market fluctuations.
We have historically provided defined benefit pension plans to our eligible employees, former employees and retirees. We fund our pension plans in compliance with the Employee Retirement Income Security Act of 1974 or local funding requirements.
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Further detail on our pension and other postretirement benefit plans is included in Note 12 of Notes to Consolidated Financial Statements.
Share-Based Compensation
We award restricted stock equivalents (“RSE”), which generally vest over two to four years. A portion of the RSE awards may provide for the issuance of common stock to certain managerial staff and executive management if specified performance targets are achieved. The fair value of each grant is estimated on the date of grant based on the current market price of the shares. The total amount of compensation expense recognized reflects the initial assumption that target performance goals will be achieved. Compensation expense may be adjusted during the life of the performance grant based on management’s assessment of the probability that performance goals will be achieved. If such goals are not met or it is determined that achievement of performance goals is not probable, compensation expense is adjusted to reflect the reduced expected payout level. If it is determined that the performance goals will be exceeded, additional compensation expense is recognized.
Non-qualified stock options (“share options”) are granted at the market price on the grant date and generally vest ratably over three years. We calculate the fair value of total share-based compensation for share options using the Black-Scholes option pricing model, which utilizes certain assumptions and estimates that have a material impact on the amount of total compensation cost recognized in our consolidated financial statements, including the expected term, expected stock price volatility, risk-free interest rate and expected dividends. The original estimate of the grant date fair value is not subsequently revised unless the awards are modified or there is a change in the number of awards expected to forfeit prior to vesting.
Further detail on Share-Based Payments is included in Note 13 of Notes to Consolidated Financial Statements.
Valuation of Long-Lived Assets
We periodically evaluate our long-lived assets, including property, plant and equipment, goodwill and intangible assets, for potential impairment indicators. Judgments regarding the existence of impairment indicators, including lower than expected cash flows from acquired businesses, are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist. We estimate fair value using valuation techniques such as discounted cash flows. This requires management to make assumptions regarding future income, working capital and discount rates, which would affect the impairment calculation. See the discussion on “Acquisitions, Goodwill and Intangible Assets” included later in this section for further information, including information on the non-cash impairment charges taken during fiscal 2019 and 2018.
Income Taxes
Our annual effective income tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, the tax effect of expenditures for which a deduction has already been taken in our tax return but has not yet been recognized in our financial statements or assets recorded at estimated fair value in business combinations for which there was no corresponding tax basis adjustment.
We estimate income taxes and the effective income tax rate in each jurisdiction that we operate. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets, the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable and possible exposures related to future tax audits. Deferred tax assets are evaluated on a subsidiary by subsidiary basis to ensure that the asset will be realized. Valuation allowances are established when the realization is not deemed to be more likely than not. Future performance is monitored, and when objectively measurable operating trends change, adjustments are made to the valuation allowances accordingly. To the extent the estimates described above change, adjustments to income taxes are made in the period in which the estimate is changed.
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We operate in multiple jurisdictions with complex tax and regulatory environments, which are subject to differing interpretations by the taxpayer and the taxing authorities. At times, we may take positions that management believes are supportable, but are potentially subject to successful challenges by the appropriate taxing authority. We evaluate our tax positions and establish liabilities in accordance with guidance governing accounting for uncertainty in income taxes. We review these tax uncertainties in light of the changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.
Further detail on Income Taxes is included in Note 5 of Notes to Consolidated Financial Statements.
Acquisitions, Goodwill and Intangible Assets
We allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results. We use a variety of information sources to determine the value of acquired assets and liabilities, including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories; actuaries for defined benefit retirement plans; and legal counsel or other experts to assess the obligations associated with legal, environmental or other claims.
During fiscal 2020, the Company used variations of the income approach in determining the fair value of intangible assets acquired in the acquisition of Cremo Holding Company, LLC. Specifically, we utilized the multi-period excess earnings method to determine the fair value of the definite lived customer relationships acquired and the relief from royalty method to determine the fair value of the definite lived trade name and proprietary technology that we acquired.
Our determination of the fair value of customer relationships acquired involved significant estimates and assumptions related to revenue growth rates, discount rates, and customer attrition rates. The determination of the fair value of trade names and proprietary technology acquired involved the use of significant estimates and assumptions related to revenue growth rates, royalty rates and discount rates. We believe that the fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use.
The recorded value of goodwill and intangible assets from recently acquired businesses are derived from more recent business operating plans and macroeconomic environmental conditions and, therefore, are likely more susceptible to an adverse change that could require an impairment charge. As such, significant judgment is required in estimating the fair value of goodwill and intangible assets. Additionally, significant judgment is needed when assigning a useful life to intangible assets. Certain intangible assets are expected to have determinable useful lives. Our assessment of intangible assets that have a determinable life is based on a number of factors including the competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment. The costs of determinable-lived intangible assets are amortized to expense over the estimated useful life. The value of residual goodwill is not amortized, but is tested at least annually for impairment. See Note 7 of Notes to Consolidated Financial Statements.
However, future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.
During the fourth quarter of fiscal 2020, we performed an annual test for impairment of goodwill on each of our reporting units: Wet Shave, Sun Care, Skin Care, and Feminine Care. As part of the annual goodwill impairment test, we estimated the fair value of each reporting unit using both market and income approaches of valuation. The income approach utilizes the discounted cash flow method and incorporates significant estimates and assumptions, including long-term projections of future cash flows, market conditions, and discount rates reflecting the risk inherent in future cash flows. The projections for future cash flows are generated using our company’s strategic plan to determine a five-year period of forecasted cash flows and operating data. The market approach uses the guideline public company method to calculate the value of each reporting unit based on the operating data of similar assets from competing publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. The multiples are adjusted given the specific characteristics of the reporting unit including its position in the market relative to the guideline companies and applied to the reporting unit’s operating data to arrive at an indication of value. The income and market approaches are weighted based on circumstances specific to each reporting unit and combined are used to calculate fair value.
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Determining the fair value of a reporting unit requires the use of significant judgment, estimates and assumptions. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether an impairment charge is recognized, and also on the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that actual future earnings or cash flows of the reporting units will not decline significantly from these projections. We will monitor any changes to these assumptions and will evaluate goodwill as deemed warranted during future periods.
The key assumptions for the market and income approaches used to determine fair value of the reporting units are updated at least annually. Those assumptions and estimates include market data and market multiples, discount rates and terminal growth rates, as well as future levels of revenue growth and operating margins, which are based upon our strategic plan. The assumptions used for the annual goodwill impairment test for fiscal year 2020 include terminal growth rates ranging from 0.25% to 2.50% and a weighted average cost of capital of 9.5%.
Our annual impairment testing date is July 1, 2020, and the valuation indicated there was no impairment of the goodwill of the reporting units. The impairment analysis performed in fiscal 2020 indicated that the Wet Shave and Skin Care reporting units had fair values that were less than 110% of the carrying amounts. Refer below for a sensitivity analysis for reporting units with less than 10% headroom between fair value and carrying value.
We evaluate the fair value of indefinite-lived intangible assets annually in conjunction with the goodwill impairment test. Our assessment of intangible assets that have an indefinite life is based on a number of factors including the competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment.
During the fourth quarter of fiscal 2020, we completed our annual impairment test of indefinite-lived intangible assets, which consist of trademarks and brand names used across our segments. The estimated fair value was determined using two income approaches: the multi-period excess earnings method and the relief-from-royalty method, both of which require significant assumptions, including estimates regarding future revenue and operating margin growth, discount rates, and appropriate royalty rates. Revenue and operating margin growth assumptions are based on historical trends and management’s expectations for future growth by brand. The discount rates were based on a weighted-average cost of capital utilizing industry market data of similar companies, in addition to estimated returns on the assets utilized in the operations of the applicable reporting unit, including net working capital, fixed assets and intangible assets. We estimated royalty rates based on operating profits of the brand.
The valuations of the indefinite-lived intangible assets had no indication of impairment as of the annual testing date on July 1, 2020. The impairment analysis performed in fiscal 2020 indicated that the Banana Boat trade name had a fair value that was less than 110% of the carrying amount. Refer below for a sensitivity analysis for the Banana Boat trade name had the key assumptions been adjusted.
Future changes in the judgment, assumptions and estimates that are used in our impairment testing could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. The assumptions used for the annual valuation for indefinite-lived intangible assets for fiscal year 2020 include terminal growth rates ranging from 0.25% to 2.50% and a weighted average cost of capital ranging from 9.75% to 11.5%.
The annual impairment analysis performed in fiscal 2020 did not indicate that impairment existed in the reporting units or indefinite lived trade names. However, the annual impairment analysis indicated that the Wet Shave and Skin Care reporting units had fair values that were less than 110% of the carrying values. Additionally, the Banana Boat trade name had a fair value that was less than 110% of the carrying amount. The carrying amount of the goodwill of the Wet Shave and Skin Care reporting units as of September 30, 2020 was $598.2 and $103.6, respectively, excluding the estimated goodwill associated with the Cremo acquisition as of September 30, 2020. The carrying amount of the Banana Boat trade name was $277.2 as of September 30, 2020. The table below presents, based on the annual impairment test performed in fiscal 2020, the change in value of the Wet Shave and Skin Care reporting units and the Banana Boat trade name, given adjustments to the key assumptions. For the analysis, we estimated the fair value of the reporting units if we increased the discount rate by 25 basis points or reduced the long-term revenue growth rate by 25 basis points and then recalculated the percentage the fair value would have exceeded the carrying amount.
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| Discount rate increased by 25 bps | Long-term growth rate decreased by 25 bps | ||||||||||
| Wet Shave reporting unit | |||||||||||
| Change in fair value | $ | (24) | $ | (19) | |||||||
| Percentage by which fair value exceeds carrying amount | 1.4 | % | 1.7 | % | |||||||
| Skin Care reporting unit | |||||||||||
| Change in fair value | $ | (8) | $ | (6) | |||||||
| Percentage by which fair value exceeds carrying amount | 1.8 | % | 2.6 | % | |||||||
| Banana Boat trade name | |||||||||||
| Change in fair value | $ | (9) | $ | (7) | |||||||
| Percentage by which fair value exceeds carrying amount | 2.2 | % | 3.0 | % | |||||||
Recently Issued Accounting Standards
Refer to Note 2 of Notes to Consolidated Financial Statements for a discussion regarding recently issued accounting standards and their estimated impact on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
($ in millions)
The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in currency rates, commodity prices, interest rates and our stock price. The following risk management discussion and the estimated amounts generated from the sensitivity analysis are forward-looking statements of market risk, assuming certain adverse market conditions occur. Company policy allows derivatives to be used only for identifiable exposures and, therefore, we do not enter into hedges for trading purposes where the sole objective is to generate profits.
Currency Rate Exposure
A significant share of our sales is tied to currencies other than the U.S. dollar, our reporting currency. As such, a weakening of currencies relative to the U.S. dollar can have a negative impact to reported earnings. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The primary currencies to which we are exposed include the euro, the Japanese yen, the British pound, the Canadian dollar and the Australian dollar.
We do business in certain developing markets, which may be susceptible to greater volatility of inflation and currency exchange rates, as well as government pricing and import controls. While the activity is not considered material in relation to the consolidated company as a whole, there could be negative impacts to operating results in certain markets if inflationary pressures, exchange volatility and government controls negatively impact our ability to operate effectively and profitably.
Derivatives Designated as Cash Flow Hedging Relationships
At September 30, 2020, we maintained a cash flow hedging program related to foreign currency risk. These derivative instruments have a high correlation to the underlying exposure being hedged and have been deemed highly effective for accounting purposes in offsetting the associated risk.
We enter into forward currency contracts to hedge the cash flow uncertainty associated with currency fluctuations. These transactions are accounted for as cash flow hedges. We had an unrealized pre-tax loss of $3.0 and an unrealized pre-tax gain of $1.7 at September 30, 2020 and 2019, respectively, on these forward currency contracts accounted for as cash flow hedges included in Accumulated other comprehensive loss (“AOCI”). Assuming foreign exchange rates versus the U.S. dollar remain at September 30, 2020 levels over the next 12 months, the majority of the pre-tax gain included in AOCI at September 30, 2020 is expected to be included in Other expense (income), net. Contract maturities for these hedges extend into fiscal year 2022. There were 64 open foreign currency contracts at September 30, 2020 with a notional value of approximately $130.2.
For further information on our derivatives designated as cash flow hedging relationships, see Note 16 of Notes to Consolidated Financial Statements.
44
Derivatives Not Designated as Cash Flow Hedging Relationships
Our foreign subsidiaries enter into internal and external transactions that create non-functional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and, to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency result in an exchange gain or loss recorded in Other expense (income), net. The primary currency to which our foreign subsidiaries are exposed is the U.S. dollar.
We enter into foreign currency derivative contracts, which are not designated as cash flow hedges for accounting purposes, to mitigate these balance sheet exposures. Any gains or losses on these contracts are expected to be offset by exchange gains or losses on the underlying exposure; thus, they are not subject to significant market risk. The change in the estimated fair value of the foreign currency contracts resulted in losses of $0.5 and $1.2 for fiscal 2020 and 2019, respectively, which were recorded in Other expense (income), net. There were five open foreign currency derivative contracts which were not designated as cash flow hedges at September 30, 2020, with a notional amount of approximately $39.0.
For further information on our derivatives not designated as cash flow hedging relationships, see Note 16 of Notes to Consolidated Financial Statements.
Commodity Price Exposure
We use raw materials that are subject to price volatility. At times, we have used, and may in the future use, hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities. At September 30, 2020, there were no open derivative or hedging instruments for future purchases of raw materials or commodities.
Interest Rate Exposure
Our exposure to interest rate risk relates primarily to our variable-rate debt instruments, which currently bear interest based on LIBOR plus margin. As of September 30, 2020, our outstanding debt included $21.1 related to our international, variable-rate note payable. Assuming a one percent increase in the applicable interest rates, annual interest expense would increase by approximately $0.2.
The remaining outstanding debt as of September 30, 2020 is fixed-rate debt. Changes in market interest rates generally affect the fair value of fixed-rate debt, but do not impact earnings or cash flows.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
| Consolidated Financial Statements | |||||
| Responsibility for Financial Statements | |||||
| Management’s Report on Internal Control over Financial Reporting | |||||
| Report of Independent Registered Public Accounting Firm | |||||
| Consolidated Statements of Earnings and Comprehensive Income (Loss) for the fiscal years ended September 30, 2020, 2019 and 2018. | |||||
| Consolidated Balance Sheets as of September 30, 2020 and 2019. | |||||
| Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2020, 2019 and 2018. | |||||
| Consolidated Statements of Changes in Shareholders’ Equity for the period from October 1, 2017 to September 30, 2020. | |||||
| Notes to Consolidated Financial Statements. | |||||
45
Responsibility for Financial Statements
The preparation and integrity of the financial statements of Edgewell Personal Care Company (the “Company”) are the responsibility of its management. These statements have been prepared in conformance with generally accepted accounting principles in the United States of America, and in the opinion of management, fairly present the Company’s financial position, results of operations and cash flows.
The Company maintains accounting and internal control systems, which it believes are adequate to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements. The selection and training of qualified personnel, the establishment and communication of accounting and administrative policies and procedures, and a program of internal audits are important elements of these control systems.
The Board of Directors, through its Audit Committee consisting solely of non-management directors, meets periodically with management, internal audit and the independent auditors to discuss audit and financial reporting matters. To assure independence, PricewaterhouseCoopers LLP has direct access to the Audit Committee.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles for external purposes. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting, because of its inherent limitations, may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework set forth in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s assessment, management has concluded that internal control over financial reporting as of September 30, 2020 was effective.
The Company's management has excluded the acquisition of Cremo Holding Company, LLC (“Cremo”) from its assessment of internal control over financial reporting as of September 30, 2020, because Cremo was acquired by the Company on September 2, 2020. The assets excluded from our assessment for the Cremo acquisition represent 0.6% of consolidated assets as of September 30, 2020 and 0.2% of consolidated net sales for the fiscal year ended September 30, 2020.
The Company’s internal control over financial reporting as of September 30, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears herein.
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Edgewell Personal Care Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Edgewell Personal Care Company and its subsidiaries (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of earnings and comprehensive income (loss), of changes in shareholders' equity and of cash flows for each of the three years in the period ended September 30, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended September 30, 2020 appearing under Item 15(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Cremo Holding Company, LLC (“Cremo”) from its assessment of internal control over financial reporting as of September 30, 2020, because it was acquired by the Company in a purchase business combination during 2020. We have also excluded Cremo from our audit of internal control over financial reporting. Cremo is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent less 0.6% and 0.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2020.
47
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Indefinite-Lived Intangible Asset Impairment Assessment – Banana Boat Trade Name
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated indefinite-lived trade names and brands balance as of September 30, 2020 was $601.4 million, which includes $277.2 million related to the Banana Boat trade name. Management evaluates indefinite-lived intangible assets annually for impairment in the fourth fiscal quarter, or when indicators of a potential impairment are present. The impairment assessment compares the carrying values of the indefinite-lived intangible assets to the estimated fair values. The estimated fair value of the indefinite-lived intangible assets was determined using one of two income approaches: (i) the multi-period excess earnings method and (ii) the relief-from-royalty method, both of which require significant assumptions, including estimates regarding future revenue and operating margin growth, discount rates, and appropriate royalty rates.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment assessment for the Banana Boat trade name is a critical audit matter are the significant judgment by management when developing the fair value of the trade name; this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s significant assumptions related to future revenue growth, operating margin, and the discount rate, used in the multi-period excess earnings method. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible asset impairment assessment, including controls over the determination of the fair value of indefinite-lived intangible assets. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the Banana Boat trade name, (ii) evaluating the appropriateness of the multi-period excess earnings method, (iii) testing the completeness and accuracy of underlying data used in the method, and (iv) evaluating the reasonableness of significant assumptions used by management related to future revenue growth, operating margin, and the discount rate. Evaluating management’s assumptions related to future revenue growth, operating margin and the discount rate involved evaluating whether the assumptions used by management were reasonable considering (i) current performance of the products supported by the trade name, (ii) relevant industry forecasts and macroeconomic conditions, (iii) management’s historical forecasting accuracy, (iv) consistency with evidence obtained in other areas of the audit, and (v) management’s objectives and strategies. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s application of the multi-period excess earnings method and the discount rate assumption.
48
Goodwill Impairment Assessments – Wet Shave and Skin Care Reporting Units
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated goodwill, net balance as of September 30, 2020 was $1,159.7 million, which includes $598.2 million related to the Wet Shave reporting unit and $103.6 million related to the Skin Care reporting unit, excluding the estimated goodwill associated with the Cremo acquisition as of September 30, 2020. Management evaluates goodwill annually for impairment in the fourth fiscal quarter, or when indicators of a potential impairment are present. The impairment assessment compares the carrying values of the reporting units to the estimated fair values. In determining the estimated fair value of the reporting units when performing a quantitative analysis, both the market approach and the income approach are considered in the valuation, and where appropriate, both methods will be used and weighted, unless appropriate market comparables are not available for a reporting unit. The key assumptions and estimates for the market and income approaches used to determine fair value of the reporting units included market data and market multiples, discount rates and terminal growth rates, as well as future levels of revenue growth, and operating margins, which are based upon the Company’s strategic plan.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for the Wet Shave and Skin Care reporting units is a critical audit matter are the significant judgment by management when developing the fair value measurement of the reporting units; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions related to revenue growth, operating margins, and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the determination of the fair value of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Wet Shave and Skin Care reporting units, (ii) evaluating the appropriateness of the income approach, (iii) testing the completeness and accuracy of underlying data used in the income approach, and (iv) evaluating the reasonableness of significant assumptions used by management related to revenue growth, operating margins, and discount rates. Evaluating management’s assumptions related to revenue growth, operating margins, and discount rates involved evaluating whether the assumptions used by management were reasonable considering (i) current and past performance of the reporting units, (ii) relevant industry forecasts and macroeconomic conditions, (iii) management’s historical forecasting accuracy, (iv) consistency with evidence obtained in other areas of the audit, and (v) management’s objectives and strategies. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s income approach and the discount rates assumptions.
Valuation of Definite Lived Trade Name and Customer Relationships Acquired Intangible Assets – Cremo Acquisition
As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Cremo Holding Company, LLC (Cremo) in fiscal year 2020. The Company’s purchase price allocation included other intangible assets of $95.1 million, which includes definite lived trade name and customer relationships. The Company used variations of the income approach in determining the fair value of intangible assets acquired in the acquisition of Cremo. Specifically, the Company utilized the multi-period excess earnings method to determine the fair value of the definite lived customer relationships acquired and the relief from royalty method to determine the fair value of the definite lived trade name acquired and proprietary technology acquired. The Company’s determination of the fair value of the intangible assets acquired involved the use of significant estimates and assumptions related to revenue growth rates, discount rates, customer attrition rates, and royalty rates.
The principal considerations for our determination that performing procedures relating to the valuation of the definite lived trade name and customer relationships intangible assets acquired in the Cremo acquisition is a critical audit matter are the significant judgment by management when developing the fair value estimates; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions relating to (i) the discount rate for both the definite lived trade name and customer relationships and (ii) the royalty rate for the definite lived trade name. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the definite lived trade name and customer relationships and controls over the development of the following significant assumptions: the discount rate for both the definite lived trade name and customer relationships and the royalty rate for the definite lived trade name. These procedures also included, among others (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of
49
the definite lived trade name and customer relationships, (iii) evaluating the appropriateness of the valuation methods, (iv) testing the completeness and accuracy of underlying data used in the methods, and (v) evaluating the reasonableness of significant assumptions related to the discount rate for both the definite lived trade name and the customer relationships and the royalty rate for the definite lived trade name. The royalty rate was evaluated by considering comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the Company’s multi-period excess earnings and relief from royalty methods and (ii) the discount rate for both the definite lived trade name and the customer relationships, and the royalty rate for the definite lived trade name.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
November 20, 2020
We have served as the Company’s auditor since 1999.
50
EDGEWELL PERSONAL CARE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | $ | 1,949.7 | $ | 2,141.0 | $ | 2,234.4 | |||||||||||
| Cost of products sold | 1,068.8 | 1,174.4 | 1,201.5 | ||||||||||||||
| Gross profit | 880.9 | 966.6 | 1,032.9 | ||||||||||||||
| Selling, general and administrative expense | 408.8 | 372.0 | 395.1 | ||||||||||||||
| Advertising and sales promotion expense | 216.2 | 250.9 | 293.3 | ||||||||||||||
| Research and development expense | 55.3 | 53.5 | 61.1 | ||||||||||||||
| Restructuring charges | 24.6 | 46.4 | 38.5 | ||||||||||||||
| Impairment charges | — | 570.0 | 24.4 | ||||||||||||||
| Gain on sale of Infant and Pet Care business | (4.1) | — | — | ||||||||||||||
| Gain on sale of Playtex gloves assets | — | — | (15.3) | ||||||||||||||
| Pension settlement expense | — | — | 5.4 | ||||||||||||||
| Interest expense associated with debt | 61.2 | 62.6 | 68.0 | ||||||||||||||
| Cost of early retirement of long-term debt | 26.2 | — | — | ||||||||||||||
| Other expense (income), net | 5.4 | 1.5 | (1.4) | ||||||||||||||
| Earnings (loss) before income taxes | 87.3 | (390.3) | 163.8 | ||||||||||||||
| Income tax provision (benefit) | 19.7 | (18.1) | 60.5 | ||||||||||||||
| Net earnings (loss) | $ | 67.6 | $ | (372.2) | $ | 103.3 | |||||||||||
| Basic earnings (loss) per share (Note 6): | |||||||||||||||||
| Net earnings (loss) | 1.25 | (6.88) | 1.90 | ||||||||||||||
| Diluted earnings (loss) per share (Note 6): | |||||||||||||||||
| Net earnings (loss) | 1.24 | (6.88) | 1.90 | ||||||||||||||
| Statements of Comprehensive Income (Loss): | |||||||||||||||||
| Net earnings (loss) | $ | 67.6 | $ | (372.2) | $ | 103.3 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation adjustments | 29.9 | (36.7) | (11.6) | ||||||||||||||
| Pension and postretirement activity, net of tax of $6.3 in 2020, ($19.4) in 2019, and ($3.0) in 2018 | 17.7 | (49.5) | (9.0) | ||||||||||||||
| Deferred (loss) gain on hedging activity, net of tax of ($1.5) in 2020, ($0.7) in 2019, and ($1.7) in 2018 | (3.3) | (1.4) | 3.7 | ||||||||||||||
| Total other comprehensive income (loss), net of tax | 44.3 | (87.6) | (16.9) | ||||||||||||||
| Total comprehensive income (loss) | $ | 111.9 | $ | (459.8) | $ | 86.4 | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
51
EDGEWELL PERSONAL CARE COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
September 30,
2020 |
September 30,
2019 |
||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 364.7 | $ | 341.6 | |||||||
| Trade receivables, less allowance for doubtful accounts of $8.2 and $5.6 | 158.8 | 205.6 | |||||||||
| Inventories | 314.1 | 357.2 | |||||||||
| Other current assets | 146.0 | 140.0 | |||||||||
| Total current assets | 983.6 | 1,044.4 | |||||||||
| Property, plant and equipment, net | 370.9 | 396.0 | |||||||||
| Goodwill | 1,159.7 | 1,032.8 | |||||||||
| Other intangible assets, net | 928.1 | 912.9 | |||||||||
| Other assets | 98.6 | 34.8 | |||||||||
| Total assets | $ | 3,540.9 | $ | 3,420.9 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Current maturities of long-term debt | $ | — | $ | 117.0 | |||||||
| Notes payable | 21.1 | 14.4 | |||||||||
| Accounts payable | 181.9 | 222.8 | |||||||||
| Other current liabilities | 307.5 | 305.4 | |||||||||
| Total current liabilities | 510.5 | 659.6 | |||||||||
| Long-term debt | 1,237.9 | 1,097.8 | |||||||||
| Deferred income tax liabilities | 102.5 | 101.1 | |||||||||
| Other liabilities | 257.1 | 258.9 | |||||||||
| Total liabilities | 2,108.0 | 2,117.4 | |||||||||
| Commitments and contingencies (Note 17) | |||||||||||
| Shareholders’ equity | |||||||||||
| Preferred shares, $0.01 par value, 10,000,000 authorized; none issued or outstanding | — | — | |||||||||
| Common shares, $0.01 par value, 300,000,000 authorized; 65,251,989 and 65,251,989 issued; 54,355,183 and 54,206,746 outstanding | 0.7 | 0.7 | |||||||||
| Additional paid-in capital | 1,631.8 | 1,627.7 | |||||||||
| Retained earnings | 782.4 | 714.8 | |||||||||
| Common shares in treasury at cost, 10,896,806 and 11,045,243 | (790.4) | (803.8) | |||||||||
| Accumulated other comprehensive loss | (191.6) | (235.9) | |||||||||
| Total shareholders’ equity | 1,432.9 | 1,303.5 | |||||||||
| Total liabilities and shareholders’ equity | $ | 3,540.9 | $ | 3,420.9 | |||||||
See accompanying Notes to Consolidated Financial Statements.
52
EDGEWELL PERSONAL CARE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash Flow from Operating Activities | |||||||||||||||||
| Net earnings (loss) | $ | 67.6 | $ | (372.2) | $ | 103.3 | |||||||||||
| Adjustments to reconcile net earnings (loss) to net cash flow from operations: | |||||||||||||||||
| Depreciation and amortization | 88.8 | 93.8 | 97.6 | ||||||||||||||
| Share-based compensation expense | 19.2 | 17.8 | 17.0 | ||||||||||||||
| Deferred income taxes | (2.9) | (59.6) | 2.3 | ||||||||||||||
| Deferred compensation payments | (8.7) | (7.5) | (16.7) | ||||||||||||||
| Loss (gain) on sale of assets | 2.3 | 1.5 | (10.9) | ||||||||||||||
| Gain on sale of Infant and Pet Care business | (4.1) | — | — | ||||||||||||||
| Cost of early retirement of long-term debt | 26.2 | — | — | ||||||||||||||
| Impairment charge | — | 570.0 | 24.4 | ||||||||||||||
| Non-cash Sun Care reformulation costs | — | — | 25.3 | ||||||||||||||
| Non-cash restructuring costs | — | — | 1.8 | ||||||||||||||
| Other, net | 1.0 | (5.7) | 19.5 | ||||||||||||||
| Changes in current assets and liabilities from operations, net of effects of acquisitions: | |||||||||||||||||
| Accounts receivable, net | 66.3 | (1.9) | (10.7) | ||||||||||||||
| Inventories | 37.1 | (35.0) | (12.3) | ||||||||||||||
| Other current assets | 3.0 | (14.7) | (2.0) | ||||||||||||||
| Accounts payable | (42.9) | (15.1) | 11.5 | ||||||||||||||
| Other current liabilities | (20.3) | 19.2 | 9.3 | ||||||||||||||
| Net cash from operating activities | 232.6 | 190.6 | 259.4 | ||||||||||||||
| Cash Flow from Investing Activities | |||||||||||||||||
| Capital expenditures | (47.7) | (58.0) | (62.0) | ||||||||||||||
| Acquisitions, net of cash acquired | (233.6) | — | (90.2) | ||||||||||||||
| Proceeds from sale of Infant Care business | 95.8 | — | — | ||||||||||||||
| Proceeds from sale of Playtex gloves assets | — | — | 19.0 | ||||||||||||||
| Investment in equity securities | (13.8) | — | — | ||||||||||||||
| Proceeds from sale of other assets | — | 4.1 | 4.7 | ||||||||||||||
| Collection of deferred purchase price from accounts receivable sold | 4.3 | 9.7 | 9.7 | ||||||||||||||
| Other, net | (1.4) | (1.3) | — | ||||||||||||||
| Net cash used by investing activities | (196.4) | (45.5) | (118.8) | ||||||||||||||
| Cash Flow from Financing Activities | |||||||||||||||||
| Cash proceeds from the issuance of Senior Notes due 2028 | 750.0 | — | — | ||||||||||||||
| Cash payments on Senior Notes due 2021 | (600.0) | — | — | ||||||||||||||
| Cash proceeds from debt with original maturities greater than 90 days | 50.0 | 434.0 | 550.0 | ||||||||||||||
| Cash payments on debt with original maturities greater than 90 days | (167.0) | (324.0) | (788.0) | ||||||||||||||
| Term Loan repayment | — | (185.0) | — | ||||||||||||||
| Net increase (decrease) in debt with original maturities of 90 days or less | 3.0 | 5.8 | (9.7) | ||||||||||||||
| Debt issuance costs for the Revolving Credit Facility | (3.6) | — | — | ||||||||||||||
| Debt issuance costs for Senior Notes due 2028 | (11.7) | — | — | ||||||||||||||
| Cost of early retirement of long-term debt | (26.2) | — | — | ||||||||||||||
| Employee shares withheld for taxes | (2.0) | (3.0) | (3.1) | ||||||||||||||
| Common shares purchased | — | — | (124.4) | ||||||||||||||
| Net financing (outflow) inflow from the Accounts Receivable Facility | (11.2) | 8.4 | (4.4) | ||||||||||||||
| Net cash used by financing activities | (18.7) | (63.8) | (379.6) | ||||||||||||||
| Effect of exchange rate changes on cash | 5.6 | (6.1) | 2.5 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 23.1 | 75.2 | (236.5) | ||||||||||||||
| Cash and cash equivalents, beginning of period | 341.6 | 266.4 | 502.9 | ||||||||||||||
| Cash and cash equivalents, end of period | $ | 364.7 | $ | 341.6 | $ | 266.4 | |||||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||||||||
| Cash paid for interest, net | $ | 56.1 | $ | 60.6 | $ | 66.6 | |||||||||||
| Cash paid for income taxes, net | 24.6 | 58.0 | 22.0 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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EDGEWELL PERSONAL CARE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions)
| Common Shares | Treasury Shares | ||||||||||||||||||||||||||||||||||||||||||||||
| Number | Par Value | Number | Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2017 | 65.2 | $ | 0.7 | (9.2) | $ | (703.9) | $ | 1,623.4 | $ | 952.9 | $ | (131.4) | $ | 1,741.7 | |||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | 103.3 | — | 103.3 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (11.6) | (11.6) | |||||||||||||||||||||||||||||||||||||||
| Pension and postretirement activity | — | — | — | — | — | — | (9.0) | (9.0) | |||||||||||||||||||||||||||||||||||||||
| Deferred gain on hedging activity | — | — | — | — | — | — | 3.7 | 3.7 | |||||||||||||||||||||||||||||||||||||||
| Impact of ASU 2018-02 | — | — | — | — | — | 17.2 | — | 17.2 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | — | — | (2.1) | (124.4) | — | — | — | (124.4) | |||||||||||||||||||||||||||||||||||||||
| Activity under share plans | — | — | 0.1 | 9.1 | 4.9 | 9.7 | — | 23.7 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2018 | 65.2 | $ | 0.7 | (11.2) | $ | (819.2) | $ | 1,628.3 | $ | 1,083.1 | $ | (148.3) | $ | 1,744.6 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (372.2) | — | (372.2) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (36.7) | (36.7) | |||||||||||||||||||||||||||||||||||||||
| Pension and postretirement activity | — | — | — | — | — | — | (49.5) | (49.5) | |||||||||||||||||||||||||||||||||||||||
| Deferred loss on hedging activity | — | — | — | — | — | — | (1.4) | (1.4) | |||||||||||||||||||||||||||||||||||||||
| Impact of ASU 2016-16 | — | — | — | — | — | 3.9 | — | 3.9 | |||||||||||||||||||||||||||||||||||||||
| Activity under share plans | — | — | 0.2 | 15.4 | (0.6) | — | — | 14.8 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 65.2 | $ | 0.7 | (11.0) | $ | (803.8) | $ | 1,627.7 | $ | 714.8 | $ | (235.9) | $ | 1,303.5 | |||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | 67.6 | — | 67.6 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | 29.9 | 29.9 | |||||||||||||||||||||||||||||||||||||||
| Pension and postretirement activity | — | — | — | — | — | — | 17.7 | 17.7 | |||||||||||||||||||||||||||||||||||||||
| Deferred loss on hedging activity | — | — | — | — | — | — | (3.3) | (3.3) | |||||||||||||||||||||||||||||||||||||||
| Activity under share plans | — | — | 0.1 | 13.4 | 4.1 | — | — | 17.5 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 65.2 | $ | 0.7 | (10.9) | $ | (790.4) | $ | 1,631.8 | $ | 782.4 | $ | (191.6) | $ | 1,432.9 | |||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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EDGEWELL PERSONAL CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Note 1 - Background and Basis of Presentation
Background
Edgewell Personal Care Company and its subsidiaries (collectively, “Edgewell” or the “Company”), is one of the world’s largest manufacturers and marketers of personal care products in the wet shave, sun and skin care and feminine care categories. Edgewell operates in more than 20 countries and has a global footprint in more than 50 countries.
The Company conducts its business in the following three segments:
•Wet Shave consists of products sold under the Schick®, Wilkinson Sword®, Edge, Skintimate®, Shave Guard® and Personna® brands, as well as non-branded products. The Company’s wet shave products include razor handles and refillable blades, disposable shave products and shaving gels and creams.
•Sun and Skin Care consists of Banana Boat® and Hawaiian Tropic® sun care products and Cremo®, Jack Black® and Bulldog® men’s skin care products, as well as Wet Ones® wipes and Playtex® household gloves until the sale of the gloves assets in October 2017.
•Feminine Care includes tampons, pads and liners sold under the Playtex Gentle Glide® and Sport®, Stayfree®, Carefree® and o.b.® brands.
Through December 2019, the Company also conducted business in its All Other segment which included infant and pet care products, such as bottles, cups and pacifiers, sold under the Playtex®, OrthoPro® and Binky® brand names, as well as the Diaper Genie® and Litter Genie® disposal systems. The Company completed the sale of the Infant and Pet Care business in December 2019.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ materially from those estimates. All intercompany balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.
Acquisition of Cremo. On September 2, 2020, the Company completed the acquisition of Cremo Holding Company, LLC (“Cremo”), a men’s skincare products company based in the United States. The results of Cremo for the post-acquisition period are included within the Company’s results since the acquisition date for the fiscal year ended September 30, 2020. For more information on the acquisition, see Note 3 of Notes to Consolidated Financial Statements.
Sale of Infant and Pet Care assets. On December 17, 2019, the Company completed the sale of its Infant and Pet Care business which was included in the All Other segment through the date of the sale. The All Other segment will have no further operating results after the first quarter of fiscal 2020. Operations for the Company’s manicure kits were reclassified to the Sun and Skin Care segment for both the current and prior year periods as these products were not part of the divestiture. The impact of recasting the prior period segment information was not material. For more information on the sale of Infant and Pet Care assets, see Note 3 of Notes to Consolidated Financial Statements.
Acquisition of Jack Black. On March 1, 2018, the Company completed the acquisition of Jack Black, L.L.C. (“Jack Black”), a luxury men’s skincare products company based in the United States. The results of Jack Black for the post-acquisition period are included within the Company’s results since the acquisition date for the fiscal years ended September 30, 2020, 2019 and 2018. For more information on the acquisition, see Note 3 of Notes to Consolidated Financial Statements.
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Note 2 - Summary of Significant Accounting Policies
Foreign Currency Translation
Financial statements of foreign operations where the local currency is the functional currency are translated using end-of-period exchange rates for assets and liabilities, and average exchange rates during the period for results of operations. Related translation adjustments are reported as a component within accumulated other comprehensive income in the shareholders’ equity section of the Consolidated Balance Sheets, except as noted below.
Gains and losses resulting from foreign currency transactions are included in Net earnings (loss). Foreign currency losses of $10.5, $3.9 and $3.7 during fiscal 2020, 2019 and 2018, respectively, were included within Other expense (income), net. The Company uses foreign exchange (“FX”) instruments to reduce the risk of FX transactions as described below and in Note 16 of Notes to Consolidated Financial Statements.
Financial Instruments and Derivative Securities
The Company uses financial instruments, from time to time, in the management of foreign currency, interest rate and other risks that are inherent to its business operations. Such instruments are not held or issued for trading purposes.
FX instruments, including forward currency contracts, are used primarily to reduce cash transaction exposures and, to a lesser extent, to manage other translation exposures. FX instruments used are selected based on their risk reduction attributes, costs and the related market conditions. The Company has designated certain foreign currency contracts as cash flow hedges for accounting purposes as of September 30, 2020.
At September 30, 2020, the Company had $21.1 of variable rate debt outstanding. The Company has, in the past, used interest rate swaps to hedge the risk of variable rate debt. As of September 30, 2020, the Company did not have any outstanding interest rate swap agreements.
For further discussion, see Note 11 and Note 16 of Notes to Consolidated Financial Statements.
Cash Equivalents
Cash equivalents are considered to be highly liquid investments with a maturity of three months or less when purchased. At September 30, 2020, the Company had $364.7 in available cash and cash equivalents, a portion of which was outside of the U.S. The Company has extensive operations outside of the U.S., including a significant manufacturing footprint. The Company manages its worldwide cash requirements by reviewing available funds among the many subsidiaries through which it conducts its business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of the Company’s subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations.
Cash Flow Presentation
The Consolidated Statements of Cash Flows are prepared using the indirect method, which reconciles Net earnings (loss) to Net cash from operating activities. The reconciliation adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in Net earnings (loss). The adjustments also remove cash flows arising from investing and financing activities, which are presented separately from operating activities. Cash flows from foreign currency transactions and operations are translated at an average exchange rate for the period. Cash flows from hedging activities are included in the same category as the items being hedged, which is primarily operating activities. Cash payments related to income taxes are classified as operating activities.
Trade Receivables
Trade receivables are stated at their net realizable value. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the trade receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Bad debt expense is included in Selling, general and administrative expense (“SG&A”). The Company began an accounts receivable factoring program in September 2017. For further discussion, see Note 10 of Notes to Consolidated Financial Statements.
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Inventories
Inventories are valued at the lower of cost or net realizable value, with cost generally being determined using average cost or the first-in, first-out (“FIFO”) method.
Capitalized Software Costs
Capitalized software costs are included in Property, plant and equipment, net. These costs are amortized using the straight-line method over periods of related benefit ranging from three to seven years. Expenditures related to capitalized software are included within Capital expenditures in the Consolidated Statements of Cash Flows. Amortization expense associated with capitalized software was $5.2, $4.3, and $5.3 in fiscal 2020, 2019 and 2018, respectively.
Property, Plant and Equipment, net
Property, plant and equipment, net (“PP&E”) is stated at historical cost. PP&E acquired as part of a business combination is recorded at estimated fair value. Expenditures for new facilities and expenditures that substantially increase the useful life of property, including interest during construction, are capitalized and reported as Capital expenditures in the accompanying Consolidated Statements of Cash Flows. Maintenance, repairs and minor renewals are expensed as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses on the disposition are reflected in Net earnings (loss). Depreciation is generally provided on the straight-line basis by charges to earnings at rates based on estimated useful lives. Estimated useful lives range from two to 10 years for machinery and equipment and three to 30 years for buildings and building improvements. Depreciation expense was $66.3, $69.9 and $74.3 in fiscal 2020, 2019 and 2018, respectively. Fiscal 2019 depreciation expense includes accelerated depreciation charges of $1.9 related to restructuring activities. See Note 4 of Notes to Consolidated Financial Statements for further information on restructuring charges.
Estimated useful lives are periodically reviewed and, when appropriate, changes are made and accounted for prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized but are instead evaluated annually for impairment as part of the Company’s annual business planning cycle in the fourth fiscal quarter, or when indicators of a potential impairment are present. The estimated fair value of each reporting unit (Wet Shave, Sun Care, Skin Care and Feminine Care) is estimated using valuation models that incorporate assumptions and projections of expected future cash flows and operating plans. In determining the estimated fair value of the reporting units when performing a quantitative analysis, both the market approach and the income approach are considered in the valuation, and where appropriate, both methods will be used and weighted, unless appropriate market comparables are not available for a reporting unit.
Determining the fair value of a reporting unit requires the use of significant judgment, estimates and assumptions. While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether an impairment charge is recognized, and also on the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that actual future earnings or cash flows of the reporting units will not vary significantly from these projections. The Company will monitor any changes to these assumptions and will evaluate the carrying value of goodwill as deemed warranted during future periods. The continued duration and severity of the COVID-19 pandemic may result in future impairment charges as a prolonged pandemic could have an additional impact on the results of the Company’s operations due to changes in consumer habits.
The key assumptions and estimates for the market and income approaches used to determine fair value of the reporting units included market data and market multiples, discount rates and terminal growth rates, as well as future levels of revenue growth, and operating margins, which are based upon the Company’s strategic plan.
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The Company evaluates indefinite-lived intangible assets, which consist of trademarks and brand names used across the Company’s segments for impairment on an annual basis. The estimated fair value was determined using one of two income approaches: (i) the multi-period excess earnings method and (ii) the relief-from-royalty method, both of which require significant assumptions, including estimates regarding future revenue and operating margin growth, discount rates, and appropriate royalty rates. Revenue and operating margin growth assumptions are based on historical trends and management’s expectations for future growth by brand. The discount rates were based on a weighted-average cost of capital utilizing industry market data of similar companies, and estimated returns on the assets utilized in the operations of the applicable reporting unit, including net working capital, fixed assets and intangible assets. The Company estimated royalty rates based on operating profits of the brand.
Intangible assets with finite lives, and a remaining weighted-average life of approximately eight years, are amortized on a straight-line basis over expected lives of five to 20 years. Such intangibles are also evaluated for impairment including ongoing monitoring of potential impairment indicators.
Refer to Note 7 of Notes to Consolidated Financial Statements for further discussion on goodwill and other intangible assets.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, other than goodwill and other intangible assets, for impairment when events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs an undiscounted cash flow analysis to determine if impairment exists for an asset or asset group. If impairment is determined to exist, any related impairment loss is calculated based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal.
Revenue Recognition
Principal Revenue Streams and Significant Judgments
Our principal revenue streams can be divided into: (i) sale of personal care products primarily through retailers in North America; (ii) sale of personal care products through a combination of retailers and distributors internationally; and iii) production and sale of private brands products in North America and internationally that are made to customer specifications.
Performance Obligations
The Company’s revenue is generated from the sale of its products. Revenue is recognized when the customer obtains control of the goods, which occurs when the ability to use and obtain benefits from the goods are passed to the customer, most commonly upon the delivery of goods to the customer. Discounts are offered to customers for early payment and an estimate of the discounts is recorded as a reduction of Net sales in the same period as the sale. The Company’s standard sales terms are final and returns or exchanges are not permitted with the exception of end of season returns for Sun Care products. Reserves are established and recorded in cases where the right of return exists for a particular sale.
The Company assesses the goods promised in its customers’ purchase orders and identifies a performance obligation to transfer goods (or a bundle of goods) that is distinct. To identify the performance obligations, the Company considers all the goods promised, whether explicitly stated or implied based on customary business practices. The Company’s purchase orders are short term in nature, lasting less than one year and contain a single delivery element. For a purchase order that has more than one performance obligation, the Company allocates the total consideration to each distinct performance obligation on a relative stand-alone selling price basis. The Company does not exclude variable consideration in determining the remaining value of performance obligations.
Significant Judgments
The Company records sales at the time that control of goods pass to the customer. The terms of these sales vary but, in all instances, the following conditions are met: (i) the sales arrangement is evidenced by purchase orders submitted by customers; (ii) the selling price is fixed or determinable; (iii) title to the product has transferred; (iv) there is an obligation to pay at a specified date without any additional conditions or actions required by the Company; and (v) collectability is reasonably assured. Simultaneously with the sale, the Company reduces Net sales and Cost of products sold and reserves amounts on its Consolidated Balance Sheet for anticipated returns based upon an estimated return level in accordance with GAAP. Customers are required to pay for the Sun Care product purchased during the season under the required terms. Under certain circumstances, the Company allows customers to return Sun Care products that have not been sold by the end of the Sun Care season, which is normal practice in the Sun Care industry. The timing of returns of Sun Care products can vary in different
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regions based on climate and other factors. However, the majority of returns occur in the U.S. from September through January following the summer Sun Care season. The Company estimates the level of Sun Care returns as the Sun Care season progresses using a variety of inputs including historical experience, consumption trends during the Sun Care season, obsolescence factors including expiration dates and inventory positions at key retailers. The Company monitors shipment activity and inventory levels at key retailers during the season in an effort to more accurately estimate potential returns. This allows the Company to manage shipment activity to its customers, especially in the latter stages of the Sun Care season, to reduce the potential for returned product. The Company also allows for returns of other products under limited circumstances. Non-Sun Care returns are evaluated each period based on communications with customers and other issues known as of period end. The Company had a reserve for returns of $44.8 and $60.4 at September 30, 2020 and September 30, 2019, respectively. The adoption of ASU 2014-09 required changes in the presentation of returns on the Consolidated Balance Sheet, namely that a return asset should be recognized for returns expected to be resold, measured at the carrying amount of goods at the time of sale, less the expected costs to recover the goods and any expected reduction in value.
In addition, the Company offers a variety of programs, such as consumer coupons and rebate programs, primarily to its retail customers, designed to promote sales of its products. Such programs require periodic payments and allowances based on estimated results of specific programs and are recorded as a reduction to Net sales. The Company accrues, at the time of sale, the estimated total payments and allowances associated with each transaction. Additionally, the Company offers programs directly to consumers to promote the sale of its products. Promotions which reduce the ultimate consumer sale price are recorded as a reduction of Net sales at the time the promotional offer is made using estimated redemption and participation levels. Taxes the Company collects on behalf of governmental authorities, which are generally included in the price to the customer, are also recorded as a reduction of Net sales. The Company continually assesses the adequacy of accruals for customer and consumer promotional program costs not yet paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these adjustments have not been material.
Contract Balances
The timing of revenue recognition is based on completion of performance obligations through the transfer of goods. Standard payment terms with customers require payment after goods have been delivered and risk of ownership has transferred to the customer. The Company has contract liabilities as a result of advanced payments received from certain customers before goods have been delivered and all performance obligations have been completed. Contract liabilities were $1.4 and $1.7 at September 30, 2020 and September 30, 2019, respectively, and were classified within Other current liabilities on our Consolidated Balance Sheets. Substantially all of the amount deferred will be recognized within a year, with the significant majority to be captured within a quarter following deferral.
Trade receivables are stated at their net realizable value. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts, and other currently available information.
Advertising and Sales Promotion Costs
The Company advertises and promotes its products through national and regional media and expenses such activities as incurred. Advertising and sales promotion expense reported on the Consolidated Statements of Earnings and Comprehensive Income (Loss) includes advertising costs of $121.2, $137.9 and $171.3 for fiscal 2020, 2019 and 2018, respectively.
Share-Based Payments
The Company grants restricted share equivalents (“RSE”), which generally vest over two to four years. The estimated fair value of each grant is estimated on the date of grant based on the current market price of the Company’s common shares. The original estimate of the grant date fair value is not subsequently revised unless the awards are modified. The Company has elected to recognize forfeiture of awards as they occur. A portion of the RSE awards provide for the issuance of common stock to certain managerial staff and executive management if the Company achieves specified performance targets. The total amount of compensation expense recognized reflects the initial assumption that target performance goals will be achieved. Compensation expense may be adjusted during the life of the performance grant based on management’s assessment of the probability that performance targets will be achieved. If such targets are not met or it is determined that achievement of performance goals is not probable, compensation expense is adjusted to reflect the reduced expected payout level in the period the determination is made. If it is determined that the performance targets will be exceeded, additional compensation expense is recognized.
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Non-qualified stock options (“Share Options”) are granted at the market price on the grant date and generally vest ratably over three years. The Company calculates the fair value of total share-based compensation for Share Options using the Black-Scholes option pricing model, which utilizes certain assumptions and estimates that have a material impact on the amount of total compensation cost recognized in the Consolidated Financial Statements, including the expected term, expected share price volatility, risk-free interest rate and expected dividends. The original estimate of the grant date fair value is not subsequently revised unless the awards are modified. The Company has elected to recognize forfeiture of awards as they occur.
Income Taxes
The Company’s annual effective income tax rate is determined based on its pre-tax income (loss), statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in the Company’s tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which the Company has already recorded the tax benefit in the Consolidated Statement of Earnings. Deferred tax liabilities generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, the tax effect of expenditures for which a deduction has already been taken in its tax return but has not yet been recognized in its financial statements or assets recorded at estimated fair value in business combinations for which there was no corresponding tax basis adjustment.
The Company estimates income taxes and the effective income tax rate in each jurisdiction that it operates. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets, the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable and possible exposures related to future tax audits. Deferred tax assets are evaluated on a subsidiary by subsidiary basis to ensure that the asset will be realized. Valuation allowances are established when the realization is not deemed to be more likely than not. Future performance is monitored, and when objectively measurable operating trends change, adjustments are made to the valuation allowances accordingly. To the extent the estimates described above change, adjustments to income taxes are made in the period in which the estimate is changed.
The Company operates in multiple jurisdictions with complex tax and regulatory environments, which are subject to differing interpretations by the taxpayer and the taxing authorities. At times, the Company may take positions that management believes are supportable but are potentially subject to successful challenges by the appropriate taxing authority. The Company evaluates its tax positions and establishes liabilities in accordance with guidance governing accounting for uncertainty in income taxes. The Company reviews these tax uncertainties in light of the changing facts and circumstances, such as the progress of tax audits, and adjusts them accordingly.
Estimated Fair Values of Financial Instruments
Certain financial instruments are required to be recorded at estimated fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, the Company does not believe any such changes would have a material impact on its financial condition, results of operations or cash flows. Other financial instruments including cash and cash equivalents and short-term borrowings, including notes payable, are recorded at cost, which approximates estimated fair value. The estimated fair values of long-term debt and financial instruments are disclosed in Note 16 of Notes to Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 which amends existing lease accounting guidance to require recognition of lease assets and lease liabilities on the balance sheet for leases previously classified as operating leases. Additionally, this update requires qualitative disclosure along with specific quantitative disclosures. The Company adopted the standard effective October 1, 2019, using the modified retrospective approach with no restatement of prior period amounts. As a result of adoption, the Company recognized leased right of use assets and liabilities of $57.4 and $57.5, respectively. The impact to the Consolidated Statements of Earnings and Comprehensive Income (Loss) and Consolidated Statement of Cash Flows was not material for fiscal 2020. Refer to Note 9 in Notes to Consolidated Financial Statements for further discussion on recently adopted accounting pronouncements.
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In August 2017, the FASB issued ASU 2017-12, which eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. The Company adopted the standard effective October 1, 2019. The impact from adoption of this new accounting pronouncement was not material to the Company's financial statements for fiscal 2020.
In June 2018, the FASB issued ASU 2018-07, which simplifies the treatment of share-based payment transactions used in acquiring goods and services from non-employees. The amendments note that measurement of share-based payments used to acquire goods or services should be valued at the grant-date fair value. The grant date is defined as the date at which the grantor and grantee reach a mutual understanding of the terms and conditions of the award. Finally, any awards containing a performance condition should be valued considering the probability of satisfying the necessary performance conditions consistent with employee share-based awards. The Company adopted the standard effective October 1, 2019. The impact from adopting this guidance was not material to the Company's financial statements for fiscal 2020.
In March 2020, the SEC issued Final Rule No. 33-10762 and Final Rule No. 34-88307, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities. The final rule amends the disclosure requirements in SEC Regulation S-X, Rule 3-10, which currently requires entities to separately present financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met. The rule permits entities to provide summarized financial information of the parent company and each issuer and guarantor in either a note to the financial statements or in management's discussion and analysis. The final rule is effective for filings beginning October 1, 2021, with early adoption permitted. The Company adopted the final rule in the second quarter of fiscal 2020.
In March 2020, the FASB issued ASU 2020-04, which provides optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate reform on financial reporting. The amendments provide expedients and exceptions to GAAP for contracts, hedging relationships, and other transactions affected by reference rate reform including contracts within the scope of Topic 310 Receivables and Topic 470 Debt, which should be accounted for prospectively adjusting the effective interest rate. Modifications within the scope of Topic 842 should be accounted for as a continuation with no reassessment of lease classification and discount rate. Additionally, modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative. These amendments are effective immediately and may be applied prospectively to new contracts and modifications entered into on or before December 31, 2022. The impact on the adoption of the guidance was not material to the financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The new guidance applies to all financial instruments, including trade receivables, and requires the measurement of all expected credit losses for financial assets held at a reporting date to be based on historical experience, current conditions and reasonable and supportable forecasts. Previous guidance did not include forward-looking information. The update will be effective for the Company beginning October 1, 2020 and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is in the process of evaluating the impact the guidance will have on its financial statements. The impact of the new guidance is not expected to be material and will be dependent on the credit quality of the trade receivables outstanding at the date of adoption. The Company evaluates the credit-worthiness of customers when negotiating contracts and, as trade receivables are short term in nature, the timing between recognition of a credit loss under existing guidance and the new guidance is not expected to differ materially.
In August 2018, the FASB issued ASU 2018-13 adjusting the disclosure requirements for fair value measurements. The guidance updates the disclosure requirements regarding leveling of fair value assets and the valuation of Level 3 fair value measurements. The update will be effective for the Company beginning October 1, 2020 and early adoption is permitted. The standard will not result in material changes to the required disclosures.
In August 2018, the FASB issued ASU 2018-14 which modifies the disclosure requirements for defined benefit pension plans and other post retirement plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The new standard will be effective for the Company beginning October 1, 2020 and early adoption is permitted. The standard will not result in material changes to the required disclosures.
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In August 2018, the FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense. The standard also requires a customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The guidance is effective for the Company beginning October 1, 2020 and early adoption is permitted. The adoption of this guidance could impact the timing of expenses associated with implementation costs for internal-use software but does not expect it to have a material impact to the financial statements or required disclosures.
In December 2019, the FASB issued ASU 2019-12, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period when interim loss exceeds anticipated loss for the year, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for the Company beginning October 1, 2021, with early adoption permitted. The Company is in the process of evaluating the impact, if any, this guidance will have on its financial statements.
In May 2020, the SEC issued Final Rule 33-10786, Amendments to Financial Disclosures and Acquired and Disposed Businesses, that amends business acquisition and disposition financial disclosure requirements. Among other modifications, the amendments change certain criteria in the significance tests used to determine the requirements for audited financial statements and related pro forma financial information, the periods audited financial statements must cover, and the form and content of the pro forma financial information. The final rule will be effective beginning January 1, 2021, however early adoption is permitted.
Note 3 - Business Combinations and Divestitures
Cremo Holding Company, LLC
On September 2, 2020, the Company completed the acquisition of Cremo Holding Company, LLC (“Cremo”). The Company accounted for the acquisition of Cremo utilizing the acquisition method of accounting, which requires assets and liabilities to be recognized based on estimates of their acquisition date fair values. The determination of the values of the acquired assets and assumed liabilities, including goodwill and other intangible assets, requires significant judgement. We have calculated fair values of assets and liabilities acquired from Cremo based on our preliminary valuation analysis. Certain preliminary values, including working capital adjustments and goodwill, are not yet finalized and are subject to change. The Company expects to complete the final fair value determination of the Cremo acquisition in fiscal year 2021.
The Company used variations of the income approach in determining the fair value of intangible assets acquired in the acquisition of Cremo. Specifically, we utilized the multi-period excess earnings method to determine the fair value of the definite lived customer relationships acquired and the relief from royalty method to determine the fair value of the definite lived trade name and proprietary technology acquired. Our determination of the fair value of the intangible assets acquired involved the use of significant estimates and assumptions related to revenue growth rates, discount rates, customer attrition rates, and royalty rates. Edgewell believes that the fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use.
The Company’s purchase price allocation for Cremo included net assets of $234.3 and consisted of working capital and other net assets of $11.5 (including cash of $0.7), other intangible assets of $95.1 and goodwill of $127.7, representing the value of expansion into new markets. Goodwill is deductible for tax purposes. The intangible assets acquired consisted primarily of the Cremo trade name, customer relationships and product formulations with a weighted average useful life of 17 years. All assets are included in the Company’s Sun and Skin Care segment.
The Company noted the revenues and net earnings of Cremo from the beginning of the period through the acquisition date were not material relative to the total net sales and net earnings of the Company during fiscal 2020, and thus pro-forma results for Cremo were not disclosed in accordance with ASC 805. Acquisition and integration costs related to Cremo totaling $7.0 for the year ended September 30, 2020, were included in SG&A on the Consolidated Statement of Earnings. Additionally, acquisition and integration costs of $0.6 were included in Cost of products sold for the year ended September 30, 2020.
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Sale of Infant and Pet Care Business
On December 17, 2019, the Company completed the sale of its Infant and Pet Care business, included in the All Other segment, for $122.5, which included consideration for providing services to the purchaser for up to one year under a transition services agreement. The Company received proceeds of $107.5, which includes the consideration for providing support under the transition services agreement, and the remaining sales price receivable includes $7.5 reported in current assets and $5.0 reported in other assets as of September 30, 2020. Total assets included in the sale were comprised of $18.8 of inventory, $3.6 of property, plant and equipment, and $77.8 of goodwill and intangible assets. The sale of the Infant and Pet Care business resulted in a gain of $4.1, net of expenses incurred to facilitate the closing of the transaction and in support of the transition services agreement.
Jack Black, L.L.C.
The Company acquired Jack Black, L.L.C. on March 1, 2018. The Company recognized the assets and liabilities of Jack Black based on estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities, including goodwill and other intangible assets, requires significant judgment. The Company completed the final fair value determination during the fourth quarter of fiscal 2018.
The Company’s purchase price allocation for Jack Black included net assets of $93.9 and consisted of working capital and other net assets of $11.9 (including cash of $3.7), other intangible assets of $47.7 and goodwill of $34.3, representing the value of expansion into new markets. Goodwill is deductible for tax purposes. The intangible assets acquired consisted primarily of the Jack Black trade name, customer relationships and product formulations with a weighted average useful life of 17 years. All assets are included in the Company’s Sun and Skin Care segment.
The Company noted the revenues and net earnings of Jack Black from the beginning of the period through the acquisition date were not material relative to the total revenues and net earnings of the Company during fiscal 2018. Acquisition and integration costs related to Jack Black, totaling $1.6 for the year ended September 30, 2019, were included in SG&A on the Consolidated Statement of Earnings. Acquisition and integration costs related to Jack Black, totaling $3.4 for the year ended September 30, 2018, were included in SG&A in the Consolidated Statement of Earnings. Additionally, acquisition and integration costs of $1.8 were included in Cost of products sold for the year ended September 30, 2018.
Sale of Playtex Gloves Assets
On October 3, 2017, the Company entered into an agreement to sell its Playtex gloves assets to a household products company for $19.0. The sale was completed on October 26, 2017. Total assets sold were approximately $3.7 resulting in a pre-tax gain on sale of $15.3 in fiscal 2018.
Note 4 - Restructuring Charges
Project Fuel
The Company does not include Project Fuel restructuring costs in the results of its reportable segments. The estimated impact of allocating such charges to segment results for fiscal 2020, 2019, and 2018 would have been as follows:
| Fiscal 2020 | |||||||||||||||||||||||||||||||||||
|
Wet
Shave |
Sun and Skin Care | Feminine Care | All Other | Corporate | Total | ||||||||||||||||||||||||||||||
| Project Fuel | |||||||||||||||||||||||||||||||||||
| Severance and related benefit costs | $ | 0.2 | $ | 0.3 | $ | — | $ | — | $ | 7.6 | $ | 8.1 | |||||||||||||||||||||||
|
Asset impairment and accelerated depreciation
|
1.7 | — | — | — | — | $ | 1.7 | ||||||||||||||||||||||||||||
|
Consulting, project implementation and management and other exit costs
|
9.5 | 0.8 | 0.4 | — | 17.6 | 28.3 | |||||||||||||||||||||||||||||
| Total Restructuring | $ | 11.4 | $ | 1.1 | $ | 0.4 | $ | — | $ | 25.2 | $ | 38.1 | |||||||||||||||||||||||
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| Fiscal 2019 | |||||||||||||||||||||||||||||||||||
|
Wet
Shave |
Sun and Skin Care |
Feminine
Care |
All Other | Corporate | Total | ||||||||||||||||||||||||||||||
| Project Fuel | |||||||||||||||||||||||||||||||||||
| Severance and related benefit costs | $ | 12.3 | $ | 2.2 | $ | 1.2 | $ | 0.5 | $ | 7.3 | $ | 23.5 | |||||||||||||||||||||||
|
Asset impairment and accelerated depreciation
|
3.1 | — | — | — | 1.1 | $ | 4.2 | ||||||||||||||||||||||||||||
|
Consulting, project implementation and management and other exit costs
|
4.8 | — | — | — | 23.1 | 27.9 | |||||||||||||||||||||||||||||
| Total Restructuring | $ | 20.2 | $ | 2.2 | $ | 1.2 | $ | 0.5 | $ | 31.5 | $ | 55.6 | |||||||||||||||||||||||
| Fiscal 2018 | |||||||||||||||||||||||||||||||||||
|
Wet
Shave |
Sun and Skin Care |
Feminine
Care |
All Other | Corporate | Total | ||||||||||||||||||||||||||||||
| Project Fuel | |||||||||||||||||||||||||||||||||||
| Severance and related benefit costs | $ | 3.1 | $ | 0.9 | $ | 1.1 | $ | 0.1 | $ | 6.9 | $ | 12.1 | |||||||||||||||||||||||
|
Asset impairment and accelerated depreciation
|
1.8 | — | — | — | — | $ | 1.8 | ||||||||||||||||||||||||||||
|
Consulting, project implementation and management and other exit costs
|
2.3 | 0.2 | — | — | 23.5 | 26.0 | |||||||||||||||||||||||||||||
| Total Restructuring | $ | 7.2 | $ | 1.1 | $ | 1.1 | $ | 0.1 | $ | 30.4 | $ | 39.9 | |||||||||||||||||||||||
Consulting, project implementation and management and other exit costs include pre-tax SG&A of $13.3, $8.6, and $1.4 for fiscal 2020, 2019, and 2018, respectively, associated with certain information technology enablement expenses and compensation expenses related to Project Fuel. Asset impairment and accelerated depreciation includes pre-tax Cost of products sold of $0.2 and $0.6 for fiscal 2020 and 2019, respectively, associated with inventory obsolescence related to Project Fuel. Project-to-date restructuring costs inclusive of information technology enablement charges and inventory obsolescence totaled $133.6.
Restructuring Reserves
The following table summarizes Project Fuel activities and related accruals:
| Utilized | |||||||||||||||||||||||||||||||||||
| October 1, 2019 |
Charge to
Income |
Other (1)
|
Cash | Non-Cash | September 30, 2020 | ||||||||||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||||||||||||||
| Severance and termination related costs | $ | 8.2 | $ | 8.1 | $ | 0.1 | $ | (12.1) | $ | — | $ | 4.3 | |||||||||||||||||||||||
|
Asset impairment and accelerated depreciation
|
— | 1.7 | — | — | (1.7) | — | |||||||||||||||||||||||||||||
| Other related costs | 1.3 | 28.3 | — | (28.5) | — | 1.1 | |||||||||||||||||||||||||||||
| Total Restructuring | $ | 9.5 | $ | 38.1 | $ | 0.1 | $ | (40.6) | $ | (1.7) | $ | 5.4 | |||||||||||||||||||||||
| Utilized | |||||||||||||||||||||||||||||||||||
| October 1, 2018 |
Charge to
Income |
Other (1)
|
Cash | Non-Cash |
September 30,
2019 |
||||||||||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||||||||||||||
| Severance and termination related costs | $ | 5.1 | $ | 23.5 | $ | — | $ | (20.4) | $ | — | $ | 8.2 | |||||||||||||||||||||||
|
Asset impairment and accelerated depreciation
|
— | 4.2 | — | — | (4.2) | — | |||||||||||||||||||||||||||||
| Other related costs | 2.6 | 27.9 | — | (29.2) | — | 1.3 | |||||||||||||||||||||||||||||
| Total Restructuring | $ | 7.7 | $ | 55.6 | $ | — | $ | (49.6) | $ | (4.2) | $ | 9.5 | |||||||||||||||||||||||
(1)Includes the impact of currency translation.
Note 5 - Income Taxes
The provisions for income taxes from continuing operations consisted of the following:
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| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Currently payable: | |||||||||||||||||
| United States - Federal | $ | 1.2 | $ | 16.1 | $ | 26.4 | |||||||||||
| State | 2.3 | 4.1 | 1.7 | ||||||||||||||
| Foreign | 19.1 | 21.7 | 29.2 | ||||||||||||||
| Total current | 22.6 | 41.9 | 57.3 | ||||||||||||||
| Deferred: | |||||||||||||||||
| United States - Federal | (2.8) | (52.4) | (4.1) | ||||||||||||||
| State | 0.5 | (7.0) | 6.5 | ||||||||||||||
| Foreign | (0.6) | (0.6) | 0.8 | ||||||||||||||
| Total deferred | (2.9) | (60.0) | 3.2 | ||||||||||||||
| Income tax provision (benefit) | $ | 19.7 | $ | (18.1) | $ | 60.5 | |||||||||||
The source of pre-tax earnings (loss) was:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| United States | $ | (27.4) | $ | (415.6) | $ | 5.3 | |||||||||||
| Foreign | 114.7 | 25.3 | 158.5 | ||||||||||||||
| Pre-tax earnings (loss) | $ | 87.3 | $ | (390.3) | $ | 163.8 | |||||||||||
A reconciliation of income taxes with the amounts computed at the statutory federal income tax rate follows:
| Fiscal Year | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Computed tax at federal statutory rate | $ | 18.3 | 21.0 | % | $ | (81.9) | 21.0 | % | $ | 40.2 | 24.5 | % | |||||||||||||||||||||||
| State income taxes, net of federal tax benefit | 1.0 | 1.1 | (13.5) | 3.5 | 0.4 | 0.2 | |||||||||||||||||||||||||||||
| Foreign tax less than the federal rate | (5.6) | (6.4) | 15.8 | (4.1) | (10.1) | (6.1) | |||||||||||||||||||||||||||||
| Adjustments to prior years’ tax accruals | (0.5) | (0.5) | (1.5) | 0.4 | 1.2 | 0.7 | |||||||||||||||||||||||||||||
|
Other taxes including repatriation of foreign earnings
|
8.2 | 9.4 | 7.9 | (2.0) | 3.7 | 2.3 | |||||||||||||||||||||||||||||
| Other, net | 1.1 | 1.3 | 5.2 | (1.3) | (0.7) | (0.4) | |||||||||||||||||||||||||||||
| Impairment | — | — | 46.8 | (12.0) | 5.7 | 3.5 | |||||||||||||||||||||||||||||
| Sale of Infant and Pet Care business | 1.6 | 1.8 | — | — | — | — | |||||||||||||||||||||||||||||
| Uncertain tax positions | (4.4) | (5.1) | (0.5) | 0.1 | (1.2) | (0.8) | |||||||||||||||||||||||||||||
| Tax reform | — | — | 3.6 | (1.0) | 21.3 | 13.0 | |||||||||||||||||||||||||||||
| Total | $ | 19.7 | 22.6 | % | $ | (18.1) | 4.6 | % | $ | 60.5 | 36.9 | % | |||||||||||||||||||||||
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The deferred tax assets and deferred tax liabilities recorded on the balance sheet were as follows, and include current and noncurrent amounts:
| September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation and property differences | $ | (28.4) | $ | (31.4) | |||||||
| Intangible assets | (180.1) | (185.4) | |||||||||
| Lease liabilities | (11.4) | — | |||||||||
| Other tax liabilities | (8.6) | (5.5) | |||||||||
| Gross deferred tax liabilities | (228.5) | (222.3) | |||||||||
| Deferred tax assets: | |||||||||||
| Accrued liabilities | 47.2 | 49.5 | |||||||||
| Deferred and share-based compensation | 16.1 | 16.4 | |||||||||
| Tax loss carryforwards and tax credits | 11.6 | 8.0 | |||||||||
| Postretirement benefits other than pensions | 1.6 | 2.5 | |||||||||
| Pension plans | 53.1 | 59.1 | |||||||||
| Inventory differences | 5.0 | 3.9 | |||||||||
| Lease right of use assets | 11.4 | — | |||||||||
| Other tax assets | 11.7 | 14.1 | |||||||||
| Gross deferred tax assets | 157.7 | 153.5 | |||||||||
| Valuation allowance | (8.5) | (7.2) | |||||||||
| Net deferred tax liabilities | $ | (79.3) | $ | (76.0) | |||||||
There were no material tax loss carryforwards that expired in fiscal 2020. Future expirations of tax loss carryforwards and tax credits, if not utilized, are not material from 2021 through 2023. The valuation allowance is primarily attributable to tax loss carryforwards and certain deferred tax assets impacted by the deconsolidation of the Company’s Venezuelan subsidiaries.
The Company generally repatriates a portion of current year earnings from select non-US subsidiaries only if the economic cost of the repatriation is not considered material. No provision is made for additional taxes on undistributed earnings of foreign affiliates that are intended and planned to be indefinitely invested in the affiliate. The Company intends to, and has plans to, reinvest these earnings indefinitely in its foreign subsidiaries to, amongst other things, fund local operations, fund pension and other post retirements obligations, fund capital projects and to support foreign growth initiatives including potential acquisitions. As of September 30, 2020, approximately $792.3 of foreign subsidiary earnings were considered indefinitely invested in those businesses. If the Company repatriated any of the earnings it could be subject to withholding tax and the impact of foreign currency movements. Accordingly, it is not practical to calculate a specific potential tax exposure. Applicable income and withholding taxes will be provided on these earnings in the periods in which they are no longer considered reinvested.
Unrecognized tax benefits activity is summarized below:
| 2020 | 2019 | 2018 | |||||||||||||||
| Unrecognized tax benefits, beginning of year | $ | 25.5 | $ | 20.7 | $ | 22.7 | |||||||||||
| Additions based on current year tax positions and acquisitions | 1.8 | 9.4 | 1.8 | ||||||||||||||
| Reductions for prior year tax positions and dispositions | (1.7) | (0.4) | (2.0) | ||||||||||||||
| Settlements with taxing authorities and statute expirations | (3.8) | (4.2) | (1.8) | ||||||||||||||
| Unrecognized tax benefits, end of year | $ | 21.8 | $ | 25.5 | $ | 20.7 | |||||||||||
Included in the unrecognized tax benefits noted above was $20.6 of uncertain tax positions that would affect the Company’s effective tax rate, if recognized. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within 12 months of this reporting date. In the Consolidated Balance Sheets, unrecognized tax benefits are classified as Other liabilities (non-current) to the extent that payments are not anticipated within one year.
The Company classifies accrued interest and penalties related to unrecognized tax benefits in the income tax provision. The accrued interest and penalties are not included in the table above. The Company accrued approximately $4.1 of interest, (net of the deferred tax asset of $0.6) at September 30, 2020, and $5.0 of interest, (net of the deferred tax asset of $0.9) at September 30, 2019. Interest was computed on the difference between the tax position recognized in accordance with GAAP and the amount previously taken or expected to be taken in the Company’s tax returns.
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The Company files income tax returns in the U.S. federal jurisdiction, various cities and states, and more than 30 foreign jurisdictions where the Company has operations. U.S. federal income tax returns for tax years ended September 30, 2016 and after remain subject to examination by the Internal Revenue Service (the “IRS”). With few exceptions, the Company is no longer subject to state and local income tax examinations for years before September 30, 2010. The status of international income tax examinations varies by jurisdiction. At this time, the Company does not anticipate any material adjustments to its financial statements resulting from tax examinations currently in progress.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted the Tax Act. This new comprehensive tax legislation reduces the U.S. federal corporate tax rate from 35% to 21% but also limits and/or eliminates certain deductions while creating new taxes on certain foreign sourced earnings. Since the Company has a September 30 fiscal year end, the lower U.S. corporate income tax rate was phased in, resulting in a blended U.S. statutory federal rate of approximately 24.5% for the fiscal year ended September 30, 2018 and 21% for September 30, 2019 and thereafter. The reduction in the U.S. corporate tax rate required the Company to remeasure its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which can be 24.5% or 21%. The Tax Act also imposed a one-time transition tax on historical earnings of certain foreign subsidiaries that were not previously taxed by the U.S.
For fiscal 2019, the discrete tax adjustment for the one-time transition tax on foreign earnings was $3.6 compared to $98.9 in fiscal 2018. The fiscal 2018 transition tax expense was offset by the estimated benefit of remeasurement of U.S. deferred tax assets and liabilities of $77.6, resulting in a net charge of $21.3 for the period, which was included as a component of income tax expense. The Company has tax loss carryforwards and tax credits, a portion of which are expected to be used to partially offset amounts payable over eight years related to the one-time transition tax on foreign earnings.
Subsequent to the Tax Act, the SEC issued rules under Staff Accounting Bulletin (“SAB”) 118 that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of December 31, 2018, the Company completed the accounting analysis for the Tax Act under SAB 118 based on current guidance, interpretations, and data available. We will continue to monitor and assess the impact of any new guidance and legislative changes.
Due to the Company’s fiscal year end, certain tax provisions of the Tax Act impacted the Company in fiscal 2018 while others were effective for fiscal year 2019 and beyond. The significant provisions of the Tax Act which impacted the Company beginning in fiscal 2019 include the full U.S. federal statutory rate reduction to 21%, the repeal of the domestic production activities deduction, tax on global intangible low-taxed income (“GILTI”), base erosion and anti-avoidance tax (“BEAT”), limitation of deductibility of certain executive compensation, limitation on business interest, and a deduction for foreign derived intangible income (“FDII”). The Company recorded tax liabilities/(benefits) for the various provisions during fiscal 2019.
The Tax Act subjects a U.S. corporation to tax on its GILTI. U.S. GAAP allows companies to make an accounting policy election of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (ii) factoring such amounts into the Company’s measurement of deferred taxes (the “deferred method”). The Company has made an accounting policy election to treat GILTI taxes as a current period expense.
The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and has not changed its previous indefinite reinvestment determination following the enactment of the Tax Act. If the Company determines that all or a portion of such foreign earnings are no longer indefinitely reinvested, the Company may be subject to additional foreign withholding taxes and U.S. federal and state income taxes beyond the Tax Act’s one-time transition tax.
Note 6 - Earnings (Loss) per Share
Basic earnings (loss) per share is based on the average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of share options and RSE awards.
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Following is the reconciliation between the number of weighted-average shares used in the basic and diluted earnings (loss) per share calculation:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Basic weighted-average shares outstanding | 54.3 | 54.1 | 54.4 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| RSE awards | 0.3 | — | 0.1 | ||||||||||||||
| Total dilutive securities | 0.3 | — | 0.1 | ||||||||||||||
| Diluted weighted-average shares outstanding | 54.6 | 54.1 | 54.5 | ||||||||||||||
For fiscal 2020, 2019 and 2018, the calculation of diluted weighted-average shares outstanding excludes 0.7, 0.5 and 0.5, respectively, of share options because the effect of including these awards was anti-dilutive. For fiscal 2020 and 2018, the calculation of diluted weighted-average shares outstanding excludes 0.1 of RSE awards because the effect of including these awards was anti-dilutive. For fiscal 2019, the calculation of diluted weighted-average shares outstanding excludes 0.1 of RSE awards that would have otherwise been dilutive, because the Company reported a net loss.
Note 7 - Goodwill and Intangible Assets
The following table sets forth goodwill by segment:
|
Wet
Shave |
Sun and Skin
Care |
Feminine
Care |
All
Other |
Total | |||||||||||||||||||||||||
| Gross balance at October 1, 2019 | $ | 960.3 | $ | 228.3 | $ | 207.0 | $ | 69.6 | $ | 1,465.2 | |||||||||||||||||||
| Accumulated goodwill impairment | (369.0) | (2.0) | — | (61.4) | (432.4) | ||||||||||||||||||||||||
| Net balance at October 1, 2019 | $ | 591.3 | $ | 226.3 | $ | 207.0 | $ | 8.2 | $ | 1,032.8 | |||||||||||||||||||
| Changes in the twelve months ended September 30, 2020 | |||||||||||||||||||||||||||||
| Cremo acquisition | $ | — | $ | 127.7 | $ | — | $ | — | $ | 127.7 | |||||||||||||||||||
| Infant and Pet Care divestiture | — | — | — | (8.2) | (8.2) | ||||||||||||||||||||||||
| Cumulative translation adjustment | 6.9 | 0.8 | (0.3) | — | 7.4 | ||||||||||||||||||||||||
| Gross balance at September 30, 2020 | $ | 967.2 | $ | 356.8 | $ | 206.7 | $ | 61.4 | $ | 1,592.1 | |||||||||||||||||||
| Accumulated goodwill impairment | (369.0) | (2.0) | — | (61.4) | (432.4) | ||||||||||||||||||||||||
| Net balance at September 30, 2020 | $ | 598.2 | $ | 354.8 | $ | 206.7 | $ | — | $ | 1,159.7 | |||||||||||||||||||
|
Wet
Shave |
Sun and Skin
Care |
Feminine
Care |
All
Other |
Total | |||||||||||||||||||||||||
| Gross balance at October 1, 2018 | $ | 968.2 | $ | 229.4 | $ | 208.0 | $ | 69.6 | $ | 1,475.2 | |||||||||||||||||||
| Accumulated goodwill impairment | — | — | — | (24.4) | (24.4) | ||||||||||||||||||||||||
| Net balance at October 1, 2018 | $ | 968.2 | $ | 229.4 | $ | 208.0 | $ | 45.2 | $ | 1,450.8 | |||||||||||||||||||
| Changes in the twelve months ended September 30, 2019 | |||||||||||||||||||||||||||||
| Impairment charges | $ | (369.0) | $ | (2.0) | $ | — | $ | (37.0) | $ | (408.0) | |||||||||||||||||||
| Cumulative translation adjustment | (7.9) | (1.1) | (1.0) | — | (10.0) | ||||||||||||||||||||||||
| Gross balance at September 30, 2019 | $ | 960.3 | $ | 228.3 | $ | 207.0 | $ | 69.6 | $ | 1,465.2 | |||||||||||||||||||
| Accumulated goodwill impairment | (369.0) | (2.0) | — | (61.4) | (432.4) | ||||||||||||||||||||||||
| Net balance at September 30, 2019 | $ | 591.3 | $ | 226.3 | $ | 207.0 | $ | 8.2 | $ | 1,032.8 | |||||||||||||||||||
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Total amortizable intangible assets were as follows:
| September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
|
Gross
Carrying Amount |
Accumulated
Amortization |
Net |
Gross
Carrying Amount |
Accumulated
Amortization |
Net | ||||||||||||||||||||||||||||||
| Trade names and brands | $ | 256.2 | $ | 45.4 | $ | 210.8 | $ | 206.4 | $ | 35.0 | $ | 171.4 | |||||||||||||||||||||||
| Technology and patents | 79.1 | 75.3 | 3.8 | 78.5 | 76.4 | 2.1 | |||||||||||||||||||||||||||||
| Customer related and other | 219.9 | 107.8 | 112.1 | 176.0 | 100.9 | 75.1 | |||||||||||||||||||||||||||||
|
Total amortizable intangible assets
|
$ | 555.2 | $ | 228.5 | $ | 326.7 | $ | 460.9 | $ | 212.3 | $ | 248.6 | |||||||||||||||||||||||
Amortization expense for intangible assets was $17.3, $17.7 and $17.7 for fiscal 2020, 2019 and 2018, respectively. Estimated amortization expense for amortizable intangible assets for fiscal 2021, 2022, 2023, 2024 and 2025 is approximately $22.0, $21.9, $21.9, $21.8 and $21.8, respectively, and $217.3 thereafter.
The Company had indefinite-lived trade names and brands of $601.4 ($183.1 in Wet Shave, $388.4 in Sun and Skin Care, and $29.9 in Feminine Care) at September 30, 2020, a decrease of $62.9 from September 30, 2019, primarily related to the divestiture of the Infant and Pet Care business, partially offset by foreign currency fluctuations. The Company had indefinite-lived trade names and brands of $664.3 ($177.7 in Wet Shave, $387.9 in Sun and Skin Care, $29.9 in Feminine Care and $68.8 in All Other) at September 30, 2019.
The change in indefinite-lived intangible assets was the result of the disposal of the Diaper Genie trade name in December 2019 and changes in foreign currency translation rates.
Goodwill and intangible assets deemed to have an indefinite life are not amortized but reviewed annually in the fourth quarter for impairment of value or when indicators of a potential impairment are present. The Company continuously monitors changing business conditions, which may indicate that the remaining useful life of goodwill and other intangible assets may warrant revision or carrying amounts may require adjustment.
Indefinite-lived intangible assets
The Company’s annual impairment testing was conducted on July 1, 2020 using the Company’s strategic plan to calculate a five-year cash flow for all trade names. The valuation of the indefinite-lived intangible assets concluded there was no indication of impairment of indefinite-lived intangible assets for the Company’s annual test. The Company performed an assessment in the fourth quarter to determine if any significant events or changes in circumstances had occurred that would be considered a potential triggering event. The Company did not identify a triggering event that would indicate the existence of additional impairment of the indefinite-lived intangible assets.
The Company performed an interim impairment analysis as of the end of the third quarter of fiscal 2019 as a result of a decline in the price of the Company’s common stock in the third quarter which was considered a triggering event. The interim impairment analysis was performed as of June 30, 2019, using the strategic plan to calculate a five-year cash flow for all trade names. The interim impairment analysis indicated that the indefinite-lived trade names for Wet Ones and Diaper Genie had carrying values that exceeded their fair values, resulting in non-cash impairments of $87.0 and $75.0, respectively, in fiscal 2019.
Goodwill
The Company performed its annual impairment analysis as of July 1, 2020 using the Company’s strategic plan to calculate a five-year cash flow for all reporting units. The analysis indicated that the fair value of each of the reporting units was greater than the respective carrying amounts of the goodwill. Additionally, the Company performed an assessment in the fourth quarter of fiscal 2020 to determine if any significant events or changes in circumstances had occurred that would be considered a potential triggering event. The assessment did not identify a triggering event that would indicate the existence of impairment of the reporting units.
During the third quarter of fiscal 2019, the Company recorded impairment charges on the goodwill of the Wet Shave, Infant Care and Skin Care reporting units totaling $369.0, $37.0 and $2.0, respectively, in fiscal 2019.
During the third quarter of fiscal 2018, the Company recorded impairment charges of $24.4 on the goodwill of the Infant Care reporting unit. The value of the Infant Care reporting unit decreased and required an impairment due to a higher discount rate and lower projected long-term future cash flows when the impairment analysis was performed.
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Annual impairment testing
The annual impairment analysis performed in fiscal 2020 did not indicate that impairment existed in the reporting units or indefinite lived trade names. However, the annual impairment analysis indicated that the Wet Shave and Skin Care reporting units had fair values that were less than 110% of the carrying values. Additionally, the Banana Boat trade name had a fair value that was less than 110% of the carrying amount. The carrying amount of the goodwill of the Wet Shave and Skin Care reporting units as of September 30, 2020 was $598.2 and $103.6, respectively, excluding the estimated goodwill associated with the Cremo acquisition as of September 30, 2020. The carrying amount of the Banana Boat trade name was $277.2 as of September 30, 2020. The table below presents, based on the annual impairment test performed in fiscal 2020, the change in value of the Wet Shave and Skin Care reporting units and the Banana Boat trade name, given adjustments to the key assumptions. The analysis performed estimated the fair value of the reporting units if the discount rate was increased by 25 basis points or the long-term revenue growth rate was reduced by 25 basis points. The fair value and percentage that the fair value would have exceeded the carrying amount were recalculated using these adjustments to the assumptions.
| Discount rate increased by 25 bps | Long-term growth rate decreased by 25 bps | ||||||||||
| Wet Shave reporting unit | |||||||||||
| Change in fair value | $ | (24) | $ | (19) | |||||||
| Percentage by which fair value exceeds carrying amount | 1.4 | % | 1.7 | % | |||||||
| Skin Care reporting unit | |||||||||||
| Change in fair value | $ | (8) | $ | (6) | |||||||
| Percentage by which fair value exceeds carrying amount | 1.8 | % | 2.6 | % | |||||||
| Banana Boat trade name | |||||||||||
| Change in fair value | $ | (9) | $ | (7) | |||||||
| Percentage by which fair value exceeds carrying amount | 2.2 | % | 3.0 | % | |||||||
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Note 8 - Supplemental Balance Sheet Information
|
September 30,
2020 |
September 30,
2019 |
||||||||||
| Inventories | |||||||||||
| Raw materials and supplies | $ | 58.5 | $ | 55.1 | |||||||
| Work in process | 71.5 | 66.5 | |||||||||
| Finished products | 184.1 | 235.6 | |||||||||
| Total inventories | $ | 314.1 | $ | 357.2 | |||||||
| Other Current Assets | |||||||||||
| Miscellaneous receivables | $ | 23.3 | $ | 14.9 | |||||||
| Inventory returns receivable | 1.0 | 4.9 | |||||||||
| Prepaid expenses | 64.8 | 65.0 | |||||||||
| Value added tax collectible from customers | 20.4 | 23.0 | |||||||||
| Income taxes receivable | 26.3 | 29.1 | |||||||||
| Other | 10.2 | 3.1 | |||||||||
| Total other current assets | $ | 146.0 | $ | 140.0 | |||||||
| Property, Plant and Equipment | |||||||||||
| Land | $ | 19.3 | $ | 18.7 | |||||||
| Buildings | 142.2 | 137.4 | |||||||||
| Machinery and equipment | 1,014.2 | 992.3 | |||||||||
| Capitalized software costs | 53.6 | 47.8 | |||||||||
| Construction in progress | 32.7 | 40.9 | |||||||||
| Total gross property, plant and equipment | 1,262.0 | 1,237.1 | |||||||||
| Accumulated depreciation | (891.1) | (841.1) | |||||||||
| Total property, plant and equipment, net | $ | 370.9 | $ | 396.0 | |||||||
| Other Current Liabilities | |||||||||||
| Accrued advertising, sales promotion and allowances | $ | 49.4 | $ | 51.9 | |||||||
| Accrued trade allowances | 30.8 | 26.2 | |||||||||
| Accrued salaries, vacations and incentive compensation | 62.6 | 51.5 | |||||||||
| Income taxes payable | 13.4 | 11.5 | |||||||||
| Returns reserve | 44.8 | 60.4 | |||||||||
| Restructuring reserve | 5.4 | 9.5 | |||||||||
| Value added tax payable | 6.8 | 3.6 | |||||||||
| Deferred compensation | 5.9 | 10.4 | |||||||||
| Short term lease obligation | 9.1 | — | |||||||||
| Customer advance payments | 1.4 | 1.7 | |||||||||
| Other | 77.9 | 78.7 | |||||||||
| Total other current liabilities | $ | 307.5 | $ | 305.4 | |||||||
| Other Liabilities | |||||||||||
| Pensions and other retirement benefits | $ | 121.0 | $ | 149.8 | |||||||
| Deferred compensation | 28.2 | 30.3 | |||||||||
| Long term lease obligation | 34.6 | — | |||||||||
| Other non-current liabilities | 73.3 | 78.8 | |||||||||
| Total other liabilities | $ | 257.1 | $ | 258.9 | |||||||
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Note 9 - Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment over a contracted period in exchange for payment. The Company evaluates if an arrangement is a lease at the effective date of the agreement. For operating leases entered into prior to October 1, 2019, the right of use (“ROU”) assets and operating lease liabilities are recognized on the balance sheet based on the present value of the remaining future minimum payments over the lease term from the implementation date. Certain leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included within the lease term when it has become reasonably certain that the Company will exercise such options. Leases entered into subsequent to the implementation date calculate the operating lease ROU asset and operating lease liabilities based on the present value of minimum payments over the lease term at the effective date of the lease.
The Company leases certain offices and manufacturing facilities, warehouses, employee vehicles and certain manufacturing related equipment. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. All recorded leases are classified as operating leases, and lease expense is recognized on a straight-line basis over the lease term.
The Company adopted ASU 2016-02 on October 1, 2019. The Company has elected to utilize the package of practical expedients permitted under the transition guidance, which allows it to carryforward its historical lease classification, its assessment on whether a contract was or contains a lease, and its assessment of initial direct costs for any leases that existed prior to October 1, 2019. Additionally, the Company has elected, as an accounting policy, not to separate non-lease components from lease components and, instead, account for these components as a single lease component. The Company has made an accounting policy election not to recognize ROU assets and lease liabilities for leases that, at the commencement date, are for 12 months or less. For leases that do not provide an implicit rate, the Company uses its secured incremental borrowing rate, based on the information available for leases, including the lease term and interest rate environment in the country in which the lease exists, to calculate the present value of the future lease payments.
A summary of the Company's lease information is as follows:
|
September 30,
2020 |
||||||||
| Assets | Classification | |||||||
| Right of use assets | Other assets | $ | 43.5 | |||||
| Liabilities | ||||||||
| Current lease liabilities | Other current liabilities | $ | 9.1 | |||||
| Long-term lease liabilities | Other liabilities | 34.6 | ||||||
| Total lease liabilities | $ | 43.7 | ||||||
| Other information | ||||||||
| Weighted-average remaining lease term (years) | 12 | |||||||
| Weighted-average incremental borrowing rate | 7.2 | % | ||||||
| Three Months Ended September 30, 2020 | Fiscal Year Ended September 30, 2020 | ||||||||||
| Statement of Earnings | |||||||||||
|
Lease cost (1)
|
$ | 3.5 | $ | 13.9 | |||||||
| Other information | |||||||||||
| Leased assets obtained in exchange for new lease liabilities | $ | 0.8 | $ | 1.9 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 3.0 | $ | 13.4 | |||||||
(1)Lease expense is included in Cost of products sold or SG&A expense based on the nature of the lease. Short-term lease expense is excluded from this amount and is not material.
72
The Company's future lease payments including reasonably assured renewal options under lease agreements are as follows:
| Operating Leases | |||||
| Fiscal 2021 | $ | 10.2 | |||
| 2022 | 7.6 | ||||
| 2023 | 6.6 | ||||
| 2024 | 5.2 | ||||
| 2025 | 4.3 | ||||
| 2026 and thereafter | 35.9 | ||||
| Total future minimum lease commitments | 69.8 | ||||
| Less: Imputed interest | (26.1) | ||||
| Present value of lease liabilities | $ | 43.7 | |||
At September 30, 2019, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements were as follows:
| Operating Leases | |||||
| Fiscal 2020 | $ | 13.6 | |||
| 2021 | 10.5 | ||||
| 2022 | 7.4 | ||||
| 2023 | 5.9 | ||||
| 2024 | 4.6 | ||||
| 2025 and thereafter | 12.5 | ||||
| Total future minimum lease commitments | $ | 54.5 | |||
Note 10 - Accounts Receivable Facility
On September 15, 2017, the Company entered into the $150 uncommitted Accounts Receivable Facility. Transfers under this agreement are accounted for as sales of receivables, resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The purchaser assumes the credit risk at the time of sale and has the right at any time to assign, transfer or participate any of its rights under the purchased receivables to another bank or financial institution. The purchase and sale of receivables under the Accounts Receivable Facility is intended to be an absolute and irrevocable transfer without recourse by the purchaser to the Company for the creditworthiness of any obligor. The Company continues to have collection and servicing responsibilities for the receivables sold and receives separate compensation for their servicing. The compensation received is considered acceptable servicing compensation and, as such, the Company does not recognize a servicing asset or liability under the facility.
As of September 30, 2020, the discount rate used to determine the purchase price for the subject receivables is based upon LIBOR plus a margin applicable to the specified obligor.
Accounts receivable sold under the Accounts Receivable Facility for the year ended September 30, 2020 and 2019 were $869.0 and $995.5, respectively. The trade receivables sold that remained outstanding under the Accounts Receivable Facility as of September 30, 2020 and 2019 were $77.0 and $74.9, respectively. The net proceeds received were included in Net cash from operating activities in the Consolidated Statement of Cash Flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of receivables in Other expense (income), net in the Consolidated Statement of Earnings. For the year ended September 30, 2020, the loss on sale of trade receivables was $1.4. For the year ended September 30, 2019, the loss on sale of trade receivables was $3.0.
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Note 11 - Debt
The detail of long-term debt was as follows:
|
September 30,
2020 |
September 30,
2019 |
||||||||||
|
Senior notes, fixed interest rate of 4.7%, due 2021(1)
|
$ | — | $ | 600.0 | |||||||
|
Senior notes, fixed interest rate of 4.7%, due 2022 (1) (2)
|
500.0 | 500.0 | |||||||||
|
Senior notes, fixed interest rate of 5.5%, due 2028(1)
|
750.0 | — | |||||||||
|
U.S. revolving credit facility due 2025 (3)
|
— | — | |||||||||
|
U.S. revolving credit facility due 2020 (3)
|
— | 117.0 | |||||||||
| Total long-term debt, including current maturities | 1,250.0 | 1,217.0 | |||||||||
| Less current portion | — | 117.0 | |||||||||
|
Less unamortized debt issuance costs and discount (1) (2)
|
12.1 | 2.2 | |||||||||
| Total long-term debt | $ | 1,237.9 | $ | 1,097.8 | |||||||
(1)At September 30, 2020, the balance for the Senior Notes due 2022 and the Senior Notes due 2028 are reflected net of debt issuance costs of $0.6 and $11.3, respectively. At September 30, 2019, the balance for the Senior Notes due 2021 and the Senior Notes due 2022 are reflected net of debt issuance costs of $0.8 and $1.0, respectively.
(2)At September 30, 2020 and September 30, 2019, the balance for the Senior Notes due 2022 was reflected net of discount of $0.2 and $0.4, respectively.
(3)Variable-rate debt based on LIBOR plus applicable margin.
At September 30, 2020 and 2019, the Company also had outstanding short-term notes payable with financial institutions with original maturities of less than 90 days of $21.1 and $14.4, respectively, with weighted-average interest rates of 4.5% and 5.2%, respectively. These notes were primarily outstanding international borrowings.
Issuance of Senior Notes
On May 22, 2020, the Company entered into a new unsecured indenture agreement for 5.50% Senior Notes in the amount of $750 due June 1, 2028 (the “2028 Notes”). The Company used a portion of the net proceeds of the 2028 Notes to satisfy and discharge its obligations outstanding under its 4.70% Senior Notes in the amount of $600 due 2021 (“2021 Notes”). The remainder of the net proceeds will be used to pay our debt related fees and expenses and for general corporate purposes, which may include, but are not limited to, the repayment of outstanding indebtedness, working capital, capital expenditures and acquisitions. The Company incurred $11.7 in bank, legal and other fees in connection with the 2028 Notes, which will be deferred and amortized to interest expense over the term of the 2028 Notes. Interest expense on the 2028 Notes is due semiannually on June 1 and December 1, with the first interest payment scheduled for December 1, 2020.
In connection with the early repayment of the 2021 Notes, the Company recorded expense of $26.2 in fiscal 2020, which is included in Cost of early retirement of long-term debt in the Consolidated Statements of Earnings and Comprehensive Income (Loss). This expense included a premium of $25.7 and debt issuance cost write-offs of $0.5.
The 2028 Notes are guaranteed, jointly and severally, by each of the Company’s direct and indirect wholly-owned domestic subsidiaries that guarantee the Company’s Revolving Credit Facility (or certain replacements thereof) or that guarantee certain capital markets indebtedness of the Company, in each case provided that the amount of such credit facility or indebtedness exceeds a specified amount, for so long as they remain guarantors under such indebtedness and subject to release in certain other circumstances. The 2028 Notes and guarantees thereof are unsecured, unsubordinated indebtedness of the Company and the guarantors.
Replacement of Credit Agreement
On April 3, 2020, the Company closed its new senior secured revolving credit facility in an aggregate principal amount of $425 (the “Revolving Credit Facility”) dated March 28, 2020, by and among, the Company and certain subsidiaries of the Company, and Bank of America, N.A. as administrative agent and collateral agent, MUFG Bank, Ltd., as syndication agent, TD Securities (USA) LLC, as joint lead arranger, and the several lenders from time to time party thereto.
Interest on any borrowings under the Revolving Credit Facility are paid monthly, bi-monthly or quarterly depending on the interest rate. Any outstanding amounts under the Revolving Credit Facility must be repaid on or before April 3, 2025. Under the Revolving Credit Facility, certain of the Company’s subsidiaries guarantee the Company’s payment and performance obligations. The Revolver will include a letter of credit sub-facility of up to $70 and will provide the Company with the ability to incur certain amounts of additional incremental loans in the future, subject to the satisfaction of certain conditions.
The Revolving Credit Facility, expandable under an accordion feature, provides for a five-year revolving line of credit and bears interest at a range of 1.50% - 2.25% over LIBOR, depending on the net debt leverage level of the Company.
74
Effective April 3, 2020, and in connection with the Revolving Credit Facility, the Company terminated the Prior Revolving Credit Facility. The Company did not have any outstanding borrowings at the termination date and no early termination penalties were incurred.
Debt Covenants
The credit agreement governing our outstanding debt at September 30, 2020 contain certain customary representations and warranties, financial covenants, covenants restricting the Company’s ability to take certain actions, affirmative covenants and provisions relating to events of default. Under the terms of the Revolving Credit Facility, the ratio of the Company’s indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the agreement and detailed below, cannot be greater than 4.0 to 1. In addition, under the Revolving Credit Facility, the ratio of the Company’s EBITDA, as defined in the credit agreement, to total interest expense must exceed 3.0 to 1. Under the credit agreement, EBITDA is defined as net earnings, as adjusted to add-back interest expense, income taxes, depreciation and amortization, all of which are determined in accordance with GAAP. In addition, the credit agreement allows certain non-cash charges such as stock award amortization and asset write-offs including, but not limited to, impairment and accelerated depreciation, and operating expense reductions or synergies to be “added-back” in determining EBITDA for purposes of the indebtedness ratio. Total debt and interest expense are calculated in accordance with GAAP. If the Company fails to comply with these covenants or with other requirements of the credit agreement, the lenders may have the right to accelerate the maturity of the debt. Acceleration under the Revolving Credit Facility would trigger cross-defaults on its other borrowings.
As of September 30, 2020, the Company was in compliance with the provisions and covenants associated with its credit agreement.
Debt Maturities
Aggregate maturities of long-term debt, including current maturities, at September 30, 2020 were as follows: $500.0 within two years and $750.0 in eight years.
Note 12 - Retirement Plans
Pensions and Postretirement Plans
The Company has several defined benefit pension plans covering employees in the U.S. and certain employees in other countries. The plans provide retirement benefits based on years of service and earnings.
The Company also sponsors or participates in a number of other non-U.S. pension and postretirement arrangements, including various retirement and termination benefit plans, some of which are required by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and, therefore, are not included in the information presented below.
The Company funds its pension plans in compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”) or local funding requirements.
The following tables present the benefit obligation, plan assets and funded status of the plans:
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| As of September 30, | |||||||||||||||||||||||
| Pension | Postretirement | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Change in projected benefit obligation | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 635.9 | $ | 571.3 | $ | 9.4 | $ | 8.3 | |||||||||||||||
| Service cost | 4.3 | 2.9 | — | — | |||||||||||||||||||
| Interest cost | 13.5 | 18.5 | 0.3 | 0.3 | |||||||||||||||||||
| Actuarial (gain) loss | 19.0 | 87.3 | (3.3) | 1.3 | |||||||||||||||||||
| Benefits paid, net | (30.0) | (34.4) | (0.3) | (0.3) | |||||||||||||||||||
| Plan settlements | (2.2) | — | — | — | |||||||||||||||||||
| Expenses paid | — | — | — | — | |||||||||||||||||||
| Foreign currency exchange rate changes | 11.6 | (9.7) | (0.1) | (0.2) | |||||||||||||||||||
| Projected benefit obligation at end of year | 652.1 | 635.9 | 6.0 | 9.4 | |||||||||||||||||||
| Change in plan assets | |||||||||||||||||||||||
| Estimated fair value of plan assets at beginning of year | 495.0 | 493.3 | — | — | |||||||||||||||||||
| Actual return on plan assets | 57.2 | 37.8 | — | — | |||||||||||||||||||
| Company contributions | 9.7 | 6.7 | 0.3 | 0.3 | |||||||||||||||||||
| Plan settlements | (2.2) | — | — | — | |||||||||||||||||||
| Benefits paid | (30.0) | (34.4) | (0.3) | (0.3) | |||||||||||||||||||
| Expenses paid | — | — | — | — | |||||||||||||||||||
| Foreign currency exchange rate changes | 8.9 | (8.4) | — | — | |||||||||||||||||||
| Estimated fair value of plan assets at end of year | 538.6 | 495.0 | — | — | |||||||||||||||||||
| Funded status at end of year | $ | (113.5) | $ | (140.9) | $ | (6.0) | $ | (9.4) | |||||||||||||||
The following table presents the amounts recognized in the Consolidated Balance Sheets and Consolidated Statements of Changes in Shareholders’ Equity:
| As of September 30, | |||||||||||||||||||||||
| Pension | Postretirement | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Amounts recognized in the Consolidated Balance Sheets | |||||||||||||||||||||||
| Noncurrent assets | $ | 0.4 | $ | 1.0 | $ | — | $ | — | |||||||||||||||
| Current liabilities | (0.9) | (3.1) | (0.2) | (0.3) | |||||||||||||||||||
| Noncurrent liabilities | (113.0) | (138.8) | (5.8) | (9.1) | |||||||||||||||||||
| Net amount recognized | $ | (113.5) | $ | (140.9) | $ | (6.0) | $ | (9.4) | |||||||||||||||
| Amounts recognized in Accumulated other comprehensive loss | |||||||||||||||||||||||
| Net loss (gain) | $ | 199.8 | $ | 220.7 | $ | (6.5) | $ | (3.3) | |||||||||||||||
| Prior service credit | — | — | — | — | |||||||||||||||||||
| Net amount recognized, pre-tax | $ | 199.8 | $ | 220.7 | $ | (6.5) | $ | (3.3) | |||||||||||||||
Pre-tax changes recognized in Other comprehensive income for fiscal 2020 were as follows:
| Pension |
Post-
retirement |
||||||||||
| Changes in plan assets and benefit obligations recognized in Other comprehensive income | |||||||||||
| Net loss arising during the year | $ | (15.1) | $ | (3.3) | |||||||
| Effect of exchange rates | 4.4 | — | |||||||||
| Amounts recognized as a component of net periodic benefit cost | |||||||||||
| Amortization or curtailment recognition of prior service cost | — | — | |||||||||
| Amortization or settlement recognition of net (loss) gain | (10.2) | 0.1 | |||||||||
| Total recognized in Other comprehensive income | $ | (20.9) | $ | (3.2) | |||||||
The minimum required contribution to our pension and post retirement plans in fiscal 2021 is $6.1 and $0.2, respectively; however, discretionary contributions may also be made.
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The Company’s expected future benefit payments are as follows:
| Pension |
Post-
retirement |
||||||||||
| Fiscal 2021 | $ | 36.3 | $ | 0.2 | |||||||
| Fiscal 2022 | 35.8 | 0.3 | |||||||||
| Fiscal 2023 | 35.1 | 0.2 | |||||||||
| Fiscal 2024 | 35.5 | 0.3 | |||||||||
| Fiscal 2025 | 33.7 | 0.2 | |||||||||
| Fiscal 2026 to 2030 | 161.4 | 1.2 | |||||||||
The accumulated benefit obligation for defined benefit pension plans was $634.8 and $618.8 at September 30, 2020 and 2019, respectively. The following table shows pension plans with an accumulated benefit obligation in excess of plan assets:
| As of September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Projected benefit obligation | $ | 625.0 | $ | 609.5 | |||||||
| Accumulated benefit obligation | 607.8 | 592.4 | |||||||||
| Estimated fair value of plan assets | 511.1 | 467.6 | |||||||||
Pension plan assets in the U.S. plan represent approximately 70% of assets in all of the Company’s defined benefit pension plans. Investment policy for the U.S. plan includes a mandate to diversify assets and invest in a variety of asset classes to achieve that goal. The U.S. plan’s assets are currently invested in several funds representing most standard equity and debt security classes. The broad target allocations are: (a) equities, including U.S. and foreign: approximately 47% and (b) debt securities, including U.S. bonds: approximately 53%. Actual allocations at September 30, 2020 approximated these targets. The U.S. plan held no shares of Company common stock at September 30, 2020. Investment objectives are similar for non-U.S. pension arrangements, subject to local regulations.
The following table presents pension and postretirement expense:
| Fiscal Year | |||||||||||||||||||||||||||||||||||
| Pension | Postretirement | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Service cost | $ | 4.3 | $ | 2.9 | $ | 3.0 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Interest cost | 13.5 | 18.5 | 16.7 | 0.3 | 0.3 | 0.4 | |||||||||||||||||||||||||||||
|
Expected return on plan assets
|
(23.1) | (25.3) | (28.6) | — | — | — | |||||||||||||||||||||||||||||
|
Recognized net actuarial loss (gain)
|
9.3 | 4.3 | 4.7 | (0.1) | (0.2) | (0.1) | |||||||||||||||||||||||||||||
| Settlement loss recognized | 0.8 | — | 5.4 | — | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost (credit) | 4.8 | 0.4 | 1.2 | 0.2 | 0.1 | 0.3 | |||||||||||||||||||||||||||||
The service cost component of the net periodic cost associated with the Company’s retirement plans is recorded to Cost of products sold and SG&A on the Consolidated Statement of Earnings. The remaining net periodic cost is recorded to Other expense (income), net on the Consolidated Statement of Earnings.
The Company utilized the spot discount rate approach, which applies the specific spot rates along the yield curve used in the determination of the benefit obligations to the relevant cash flows.
Amounts expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost (credit) during fiscal 2021, are as follows:
| Pension | |||||
| Net actuarial (loss) gain | $ | (5.0) | |||
| Prior service (cost) credit | $ | — | |||
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The following table presents assumptions, which reflect weighted-averages for the component plans, used in determining the above information:
| Fiscal Year | |||||||||||||||||||||||||||||||||||
| Pension | Postretirement | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Plan obligations: | |||||||||||||||||||||||||||||||||||
| Discount rate | 2.1 | % | 2.5 | % | 3.7 | % | 2.8 | % | 3.0 | % | 4.0 | % | |||||||||||||||||||||||
| Compensation increase rate | 2.5 | % | 2.5 | % | 2.5 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||
| Net periodic benefit cost: | |||||||||||||||||||||||||||||||||||
| Discount rate | 2.5 | % | 3.7 | % | 3.3 | % | 3.0 | % | 4.0 | % | 3.7 | % | |||||||||||||||||||||||
|
Expected long-term rate of return on plan assets
|
4.8 | % | 5.2 | % | 6.1 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||
| Compensation increase rate | 2.5 | % | 2.5 | % | 2.5 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||
The expected return on plan assets was determined based on historical and expected future returns of the various asset classes, using the target allocations described above.
The following table sets forth the estimated fair value of the Company’s pension assets segregated by level within the estimated fair value hierarchy. Refer to Note 16 of Notes to Consolidated Financial Statements for further discussion on the estimated fair value hierarchy and estimated fair value principles.
| As of September 30, 2020 | |||||||||||||||||
| Pension assets at estimated fair value | Level 1 | Level 2 | Total | ||||||||||||||
| Equity | |||||||||||||||||
| U.S. equity | $ | 96.9 | $ | — | $ | 96.9 | |||||||||||
| International equity | 68.7 | — | 68.7 | ||||||||||||||
| Debt | |||||||||||||||||
| U.S. government | — | 191.7 | 191.7 | ||||||||||||||
| Other government | — | 1.4 | 1.4 | ||||||||||||||
| Corporate | 65.3 | 2.1 | 67.4 | ||||||||||||||
| Cash and cash equivalents | 8.4 | 1.6 | 10.0 | ||||||||||||||
| Other | 1.0 | 14.0 | 15.0 | ||||||||||||||
| Total, excluding investments valued at net asset value (“NAV”) | $ | 240.3 | $ | 210.8 | $ | 451.1 | |||||||||||
| Investments valued at NAV | 87.5 | ||||||||||||||||
| Total | $ | 240.3 | $ | 210.8 | $ | 538.6 | |||||||||||
| As of September 30, 2019 | |||||||||||||||||
| Pension assets at estimated fair value | Level 1 | Level 2 | Total | ||||||||||||||
| Equity | |||||||||||||||||
| U.S. equity | $ | 79.0 | $ | — | $ | 79.0 | |||||||||||
| International equity | 62.1 | — | 62.1 | ||||||||||||||
| Debt | |||||||||||||||||
| U.S. government | — | 182.1 | 182.1 | ||||||||||||||
| Other government | — | 2.9 | 2.9 | ||||||||||||||
| Corporate | 61.1 | 1.4 | 62.5 | ||||||||||||||
| Cash and cash equivalents | 10.3 | 0.6 | 10.9 | ||||||||||||||
| Other | 0.5 | 16.5 | 17.0 | ||||||||||||||
| Total, excluding investments valued at NAV | $ | 213.0 | $ | 203.5 | $ | 416.5 | |||||||||||
| Investments valued at NAV | 78.5 | ||||||||||||||||
| Total | $ | 213.0 | $ | 203.5 | $ | 495.0 | |||||||||||
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The following table sets forth the estimated fair value of the Company’s pension assets valued at NAV:
| As of September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Pension assets valued at NAV estimated at fair value | |||||||||||
| Equity | |||||||||||
| U.S. equity | $ | 10.2 | $ | 9.5 | |||||||
| International equity | 77.3 | 69.0 | |||||||||
| Total investments valued at NAV | $ | 87.5 | $ | 78.5 | |||||||
There were no Level 3 pension assets as of September 30, 2020 and 2019.
The Company had no postretirement plan assets as of September 30, 2020 and 2019.
The Company’s investment objective for defined benefit retirement plan assets is to satisfy the current and future pension benefit obligations. The investment philosophy is to achieve this objective through diversification of the retirement plan assets. The goal is to earn a suitable return with an appropriate level of risk while maintaining adequate liquidity to distribute benefit payments. The diversified asset allocation includes equity positions as well as fixed income investments. The increased volatility associated with equities is offset with higher expected returns, while the long duration fixed income investments help dampen the volatility of the overall portfolio. Risk exposure is controlled by re-balancing the retirement plan assets back to target allocations, as needed. Investment firms managing retirement plan assets carry out investment policy within their stated guidelines. Investment performance is monitored against benchmark indices, which reflect the policy and target allocation of the retirement plan assets.
Defined Contribution Plan
The Company sponsors a defined contribution plan, which extends participation eligibility to the vast majority of U.S. employees. Effective January 1, 2014, the Company matches 100% of participants’ before-tax or Roth contributions up to 6% of eligible compensation. Amounts charged to expense during fiscal 2020, 2019, and 2018 were $9.9, $9.7, and $10.2, respectively, and are reflected in SG&A and Cost of products sold.
Note 13 - Share-Based Payments
As of September 30, 2020, the Company had three share-based compensation plans: the Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”), the Second Amended and Restated 2009 Incentive Stock Plan (the “2009 Plan”) and the 2000 Incentive Stock Plan. The 2000 Incentive Stock Plan was superseded by the 2009 Plan, which was then superseded by the 2018 Stock Incentive Plan. New awards granted after January 2018 are issued under the 2018 Plan. The 2018 Plan provides for the award of restricted stock, RSEs or Share Options to purchase the Company’s common stock to directors, officers and employees of the Company. The maximum number of shares authorized for issuance under the 2018 Plan is 14.9, of which 4.4 were available for future awards as of September 30, 2020.
Share options are granted at the market price on the grant date and generally vest ratably over three years. These awards typically have a maximum term of ten years. Restricted stock and RSEs may also be granted. Option shares and prices, and restricted stock and RSEs, are adjusted in conjunction with stock splits and other recapitalizations, including the Separation, so that the holder is in the same economic position before and after these equity transactions.
The Company uses the straight-line method of recognizing compensation cost. Total compensation costs charged against earnings before income taxes for the Company’s share-based compensation arrangements were $19.2, $17.8 and $17.0 for fiscal 2020, 2019 and 2018, respectively, and were recorded in SG&A. The total income tax benefit recognized for share-based compensation arrangements was $4.6, $4.3 and $4.6, for fiscal 2020, 2019 and 2018, respectively. Restricted stock issuance and shares issued for share option exercises under the Company’s share-based compensation program are generally issued from treasury shares.
79
Share Options
The following table summarizes Share Option activity during fiscal 2020:
| Shares | Weighted-Average Exercise Price |
Weighted-Average Remaining Contractual Term
(in years) |
Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding as of October 1, 2019 | 0.5 | $ | 82.53 | ||||||||||||||||||||
| Granted | 0.2 | 31.44 | |||||||||||||||||||||
| Canceled | — | — | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Outstanding as of September 30, 2020 | 0.7 | $ | 67.90 | 6.7 | $ | — | |||||||||||||||||
| Vested and unvested expected to vest as of September 30, 2020 | 0.7 | $ | 67.90 | 6.7 | $ | — | |||||||||||||||||
| Exercisable as of September 30, 2020 | 0.4 | 87.83 | |||||||||||||||||||||
No share options were exercised in fiscal 2020, 2019 or 2018.
The Company estimates the grant-date fair value of share option awards using the Black-Scholes option pricing model. During fiscal 2020 and 2019, the Company granted 0.2 and 0.1, respectively, non-qualified share option awards to certain executives and employees with a grant-date fair value of $1.9 and $1.7, respectively. The following table presents the Company’s weighted average fair value per option and the assumptions utilized in the Black-Scholes option pricing model.
| 2020 | 2019 | ||||||||||
| Weighted-average fair value per share option | $ | 9.33 | $ | 13.02 | |||||||
| Expected volatility | 27.00 | % | 24.00 | % | |||||||
| Risk-free interest rate | 1.66 | % | 2.95 | % | |||||||
| Expected share option life (in years) | 6.0 | 6.0 | |||||||||
| Dividend yield | — | % | — | % | |||||||
As of September 30, 2020, there was an estimated $1.5 of total unrecognized compensation costs related to share option awards, which will be recognized over a weighted-average period of approximately 2.8 years.
Restricted Share Equivalents
The following table summarizes RSE award activity during fiscal 2020:
| Shares |
Weighted-Average
Grant Date Estimated Fair Value |
||||||||||
| Non-vested at October 1, 2019 | 1.1 | $ | 48.85 | ||||||||
| Granted | 1.1 | 28.58 | |||||||||
| Vested | (0.2) | 50.76 | |||||||||
| Canceled | (0.1) | 53.41 | |||||||||
| Non-vested at September 30, 2020 | 1.9 | 36.77 | |||||||||
The Company records estimated expense for performance-based grants based on target achievement of performance metrics for the three-year period for each respective program, unless evidence exists that achievement above or below target for the applicable performance metric is more likely to occur. The estimated fair value of the award is determined using the closing share price of the Company’s common stock on the date of grant. As of September 30, 2020, there were 0.9 performance-based RSEs outstanding, which are included in the table above.
As of September 30, 2020, there was an estimated $32.5 of total unrecognized compensation costs related to RSEs, which will be recognized over a weighted-average period of approximately 2.1 years. The weighted-average estimated fair value per RSE
80
granted in fiscal 2020, 2019 and 2018 was $28.58, $42.93, and $57.23, respectively. The estimated fair value of RSEs vested in fiscal 2020, 2019 and 2018 was $11.5, $13.9, and $15.7, respectively.
Note 14 - Shareholders’ Equity
At September 30, 2020, there were 300.0 shares of the Company’s common stock authorized, of which 4.4 shares were reserved for outstanding awards under the 2018, 2009 and 2000 Incentive Stock Plans. The Company’s Amended and Restated Articles of Incorporation authorize it to issue up to 10.0 shares of $0.01 par value preferred stock. As of September 30, 2020, there were no shares of preferred stock issued or outstanding.
During fiscal 2020, 0.1 shares were purchased related to the surrender of shares of common stock to satisfy tax withholding obligations in connection with the vesting of RSEs.
During fiscal 2018, the Company paid $0.1 of cash dividends related to the vesting of RSEs, which had been declared and accrued during prior fiscal years. Any future dividends are dependent on future earnings, capital requirements and the Company’s financial condition and will be declared at the sole discretion of the Board.
Note 15 - Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss (“AOCI”), net of tax, by component:
| Foreign Currency Translation Adjustments | Pension and Post-retirement Activity | Hedging Activity | Total | ||||||||||||||||||||
| Balance at October 1, 2018 | $ | (40.6) | $ | (110.3) | $ | 2.6 | $ | (148.3) | |||||||||||||||
|
OCI before reclassifications (1)
|
(36.7) | (52.5) | 1.8 | (87.4) | |||||||||||||||||||
| Reclassifications to earnings | — | 3.0 | (3.2) | (0.2) | |||||||||||||||||||
| Balance at September 30, 2019 | (77.3) | (159.8) | 1.2 | (235.9) | |||||||||||||||||||
|
OCI before reclassifications (1)
|
29.9 | 10.4 | (1.8) | 38.5 | |||||||||||||||||||
| Reclassifications to earnings | — | 7.3 | (1.5) | 5.8 | |||||||||||||||||||
| Balance at September 30, 2020 | $ | (47.4) | $ | (142.1) | $ | (2.1) | $ | (191.6) | |||||||||||||||
(1)OCI is defined as other comprehensive income (loss).
The following table presents the reclassifications out of AOCI:
| Fiscal Year | ||||||||||||||||||||
| Details of AOCI Components | 2020 | 2019 | Affected Line Item in the Consolidated Statement of Earnings | |||||||||||||||||
|
Gains and losses on cash flow hedges
|
||||||||||||||||||||
| Foreign exchange contracts | $ | 2.1 | $ | 4.8 | Other expense (income), net | |||||||||||||||
| 2.1 | 4.8 | Total before tax | ||||||||||||||||||
| 0.6 | 1.6 | Income tax provision (benefit) | ||||||||||||||||||
| $ | 1.5 | $ | 3.2 | Net of tax | ||||||||||||||||
|
Amortization of defined benefit pension and postretirement items
|
||||||||||||||||||||
| Prior service costs | $ | — | $ | — | (1) | |||||||||||||||
| Actuarial losses | (9.3) | (4.1) | (1) | |||||||||||||||||
| Settlements | (0.8) | — | (1) | |||||||||||||||||
| (10.1) | (4.1) | Total before tax | ||||||||||||||||||
| (2.8) | (1.1) | Tax expense (benefit) | ||||||||||||||||||
| $ | (7.3) | $ | (3.0) | Net of tax | ||||||||||||||||
| Total reclassifications for the period | $ | (5.8) | $ | 0.2 | Net of tax | |||||||||||||||
(1)These AOCI components are included in the computation of net periodic benefit cost. See Note 12 of Notes to Consolidated Financial Statements.
81
Note 16 - Financial Instruments and Risk Management
At times, the Company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency and interest rate risks. The section below outlines the types of derivatives that existed at September 30, 2020 and 2019, as well as the Company’s objectives and strategies for holding derivative instruments.
Foreign Currency Risk
A significant share of the Company’s sales are tied to currencies other than the U.S. dollar, the Company’s reporting currency. As such, a weakening of currencies relative to the U.S. dollar can have a negative impact to reported earnings. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The primary currencies to which the Company is exposed include the euro, the Japanese yen, the British pound, the Canadian dollar and the Australian dollar.
Additionally, the Company’s foreign subsidiaries enter into internal and external transactions that create non-functional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and, to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in an exchange gain or loss recorded in Other expense (income), net. The primary currency to which the Company’s foreign subsidiaries are exposed is the U.S. dollar.
Interest Rate Risk
The Company has interest rate risk with respect to interest expense on variable rate debt. At September 30, 2020, the Company had $21.1 of variable rate debt outstanding, which consisted primarily of outstanding borrowings under the Company’s revolving credit facilities in the U.S.
Other Risks
Customer Concentration. Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. The Company’s largest customer, Walmart Inc. and its affiliates (collectively, “Walmart”), accounted for approximately 22% of Net sales in fiscal 2020. No other customer accounted for more than 10% of the Company’s consolidated Net sales. Purchases by Walmart included products from all of the Company’s segments. Additionally, in fiscal 2020, Target Corporation represented approximately 10% of net sales for each of our Sun and Skin Care and Feminine Care segments, respectively.
Product Concentration. Within the Wet Shave segment, the Company’s razor and blades represented 52%, 52% and 53% of net sales during fiscal 2020, 2019 and 2018, respectively, and within the Sun and Skin Care segment, sun care products represented 15% of net sales during each of fiscal 2020, 2019 and 2018.
Cash Flow Hedges
At September 30, 2020, the Company maintained a cash flow hedging program related to foreign currency risk. These derivative instruments have a high correlation to the underlying exposure being hedged and have been deemed highly effective for accounting purposes in offsetting the associated risk.
The Company entered into a series of forward currency contracts to hedge cash flow uncertainty associated with currency fluctuations. These transactions are accounted for as cash flow hedges. The Company had an unrealized pre-tax loss of $3.0 and an unrealized pre-tax gain of $1.7 at September 30, 2020 and 2019, respectively, on these forward currency contracts accounted for as cash flow hedges included in AOCI. Assuming foreign exchange rates versus the U.S. dollar remain at September 30, 2020 levels over the next 12 months, the majority of the pre-tax gain included in AOCI at September 30, 2020 is expected to be included in Other expense (income), net. Contract maturities for these hedges extend into fiscal year 2021. At September 30, 2020, there were 64 open foreign currency contracts with a total notional value of $130.2.
82
Derivatives not Designated as Hedges
The Company entered into foreign currency derivative contracts which are not designated as cash flow hedges for accounting purposes to hedge balance sheet exposures. Any gains or losses on these contracts are expected to be offset by exchange gains or losses on the underlying exposures, thus they are not subject to significant market risk. The change in estimated fair value of the foreign currency contracts resulted in losses of $0.5 and $1.2 for fiscal 2020 and 2019, respectively, which were recorded in Other expense (income), net. There were five open foreign currency derivative contracts which were not designated as cash flow hedges at September 30, 2020, with a total notional value of $39.0.
The following table provides estimated fair values of derivative instruments:
|
Fair Value of (Liability) Asset (1)
|
|||||||||||
|
September 30,
2020 |
September 30,
2019 |
||||||||||
| Derivatives designated as cash flow hedging relationships: | |||||||||||
| Foreign currency contracts | $ | (3.0) | $ | 1.7 | |||||||
| Derivatives not designated as cash flow hedging relationships: | |||||||||||
| Foreign currency contracts | $ | (0.6) | $ | 0.4 | |||||||
(1)All derivative assets are presented in Other current assets or Other assets. All derivative liabilities are presented in Other current liabilities or Other liabilities.
The following table provides the amounts of gains and losses on derivative instruments:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Derivatives designated as cash flow hedging relationships: | |||||||||||||||||
| Foreign currency contracts | |||||||||||||||||
|
(Loss) gain recognized in OCI (1)
|
$ | (2.7) | $ | 2.7 | $ | 3.9 | |||||||||||
|
Gain (loss) reclassified from AOCI into income (effective portion) (1) (2)
|
2.1 | 4.8 | (1.5) | ||||||||||||||
| Derivatives not designated as cash flow hedging relationships: | |||||||||||||||||
| Foreign currency contracts | |||||||||||||||||
|
(Loss) gain recognized in income (2)
|
$ | (0.5) | $ | (1.2) | $ | 1.7 | |||||||||||
(1)Each of these derivative instruments had a high correlation to the underlying exposure being hedged for the periods indicated and had been deemed highly effective in offsetting associated risk.
(2)Gain (loss) was recorded in Other expense (income), net.
The following table provides financial assets and liabilities for balance sheet offsetting:
| As of September 30, 2020 | As of September 30, 2019 | ||||||||||||||||||||||
|
Assets (1)
|
Liabilities (2)
|
Assets (1)
|
Liabilities (2)
|
||||||||||||||||||||
| Foreign currency contracts | |||||||||||||||||||||||
| Gross amounts of recognized assets (liabilities) | $ | — | $ | (3.7) | $ | 2.4 | $ | (0.5) | |||||||||||||||
| Gross amounts offset in the balance sheet | — | 0.1 | — | 0.2 | |||||||||||||||||||
| Net amounts of assets (liabilities) presented in the balance sheet | $ | — | $ | (3.6) | $ | 2.4 | $ | (0.3) | |||||||||||||||
(1)All derivative assets are presented in Other current assets or Other assets.
(2)All derivative liabilities are presented in Other current liabilities or Other liabilities.
83
Fair Value Hierarchy
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
Under the fair value accounting guidance hierarchy, an entity is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The following table sets forth the Company’s financial assets and liabilities, which are carried at fair value, that are measured on a recurring basis during the period, all of which are classified as Level 2 within the fair value hierarchy:
| As of September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (Liabilities) Assets at estimated fair value: | |||||||||||
| Deferred compensation | $ | (33.9) | $ | (40.6) | |||||||
| Derivatives - foreign currency contracts | (3.6) | 2.1 | |||||||||
| Net liabilities at estimated fair value | $ | (37.5) | $ | (38.5) | |||||||
At September 30, 2020 and 2019, the Company had no Level 1 or Level 3 financial assets or liabilities, other than pension plan assets which contained certain assets classified as Level 1. Refer to Note 12 of Notes to Consolidated Financial Statements for the fair value hierarchy of the pension plan assets.
At September 30, 2020 and 2019, the fair market value of fixed rate long-term debt was $1,323.1 and $1,071.2, respectively, compared to its carrying value of $1,250.0 and $1,100.0, respectively. The estimated fair value of the fixed-rate long-term debt is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements. There was no variable rate debt excluding revolving credit facilities as of September 30, 2020. The estimated fair values of long-term debt, excluding revolving credit facilities, have been determined based on Level 2 inputs.
Due to the nature of cash and cash equivalents and short-term borrowings, including notes payable, carrying amounts on the balance sheets approximate fair value. Additionally, the carrying amounts of the Company’s revolving credit facilities, which are classified as long-term debt on the balance sheet, approximate fair value due to the revolving nature of the balances. The estimated fair value of cash and cash equivalents, short-term borrowings and the revolving credit agreements have been determined based on Level 2 inputs.
As of September 30, 2020, the estimated fair value of foreign currency contracts is the amount that the Company would receive or pay to terminate the contracts, considering first the quoted market prices of comparable agreements or, in the absence of quoted market prices, factors such as interest rates, currency exchange rates and remaining maturities. The estimated fair value of the deferred compensation liability is determined based upon the quoted market prices of the investment options that are offered under the plan.
Note 17 - Commitments and Contingencies
Legal Proceedings
The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations during the ordinary course of business. Many of these legal matters are in preliminary stages and involve complex issues of law and fact and may proceed for protracted periods of time. The amount of liability, if any, from these proceedings cannot be determined with certainty. The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company believes that its liability, if any, arising from such pending legal proceedings,
84
asserted legal claims and known potential legal claims which are likely to be asserted, is not reasonably likely to be material to its financial position, results of operations or cash flows, when taking into account established accruals for estimated liabilities.
Government Regulation and Environmental Matters
The operations of the Company are subject to various federal, state, foreign and local laws and regulations intended to protect the public health and environment.
Contamination has been identified at certain of the Company’s current and former facilities, as well as third-party waste disposal sites, and the Company is conducting investigation and remediation activities in relation to such properties. In connection with certain sites, the Company has received notices from the U.S. Environmental Protection Agency, state agencies and private parties seeking contribution, that it has been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), and may be required to share in the cost of cleanup with respect to a number of federal “Superfund” sites. The Company may also be required to share in the cost of cleanup with respect to state-designated sites, and certain international locations, as well as any of its own properties.
The amount of the Company’s ultimate liability in connection with those sites may depend on many factors, including the volume and toxicity of material contributed to the site, the number of other PRPs and their financial viability, and the remediation methods and technology to be used. Total environmental capital expenditures and operating expenses are not expected to have a material effect on the Company’s total capital and operating expenditures, cash flows, earnings or competitive position. Current environmental spending estimates may be modified as a result of changes in the Company’s plans or its understanding of the underlying facts, changes in legal requirements, including any requirements related to global climate change, or other factors.
Many European countries, as well as the European Union, have been very active in adopting and enforcing environmental regulations. As such, it is possible that new regulations may increase the risk and expense of doing business in such countries.
Certain of the Company’s products are subject to regulation under the U.S. Federal Food, Drug and Cosmetic Act and are regulated by the U.S. Food and Drug Administration.
Note 18 - Segment and Geographical Data
Segment performance is evaluated based on segment profit, exclusive of general corporate expenses, share-based compensation costs, impairment charges, costs associated with restructuring initiatives, acquisition and integration costs, cost of early debt retirement, advisory expenses incurred in connection with the evaluation of the Feminine Care and Infant Care businesses, Sun Care reformulation costs, investor settlement expenses, the gain on sale of the Infant and Pet Care business and the Playtex gloves assets, pension settlement expense and the amortization of intangible assets. Financial items, such as interest income and expense, are managed on a global basis at the corporate level. The exclusion of such charges from segment results reflects management’s view on how it evaluates segment performance.
The Company’s operating model includes some shared business functions across the segments, including product warehousing and distribution, transaction processing functions and, in most cases, a combined sales force and management teams. The Company applies a fully allocated cost basis, in which shared business functions are allocated among the segments. Such allocations are estimates, and do not represent the costs of such services if performed on a stand-alone basis.
Segment net sales and profitability are presented below:
85
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net Sales | |||||||||||||||||
| Wet Shave | $ | 1,162.3 | $ | 1,250.1 | $ | 1,330.1 | |||||||||||
| Sun and Skin Care | 462.0 | 463.1 | 453.3 | ||||||||||||||
| Feminine Care | 298.6 | 308.1 | 329.5 | ||||||||||||||
| All Other | 26.8 | 119.7 | 121.5 | ||||||||||||||
| Total net sales | $ | 1,949.7 | $ | 2,141.0 | $ | 2,234.4 | |||||||||||
| Segment Profit | |||||||||||||||||
| Wet Shave | $ | 206.2 | $ | 246.5 | $ | 265.2 | |||||||||||
| Sun and Skin Care | 69.1 | 80.4 | 80.9 | ||||||||||||||
| Feminine Care | 52.3 | 48.3 | 37.2 | ||||||||||||||
| All Other | 3.1 | 11.7 | 18.5 | ||||||||||||||
| Total segment profit | 330.7 | 386.9 | 401.8 | ||||||||||||||
| General corporate and other expenses | (54.9) | (57.3) | (68.8) | ||||||||||||||
| Impairment charges | — | (570.0) | (24.4) | ||||||||||||||
|
Restructuring and related costs (1)
|
(38.1) | (55.6) | (39.9) | ||||||||||||||
|
Acquisition and integration costs (2)
|
(39.8) | (6.7) | (5.2) | ||||||||||||||
| Cost of early retirement of long-term debt | (26.2) | — | — | ||||||||||||||
| Gain on sale of Infant and Pet Care business | 4.1 | — | — | ||||||||||||||
|
COVID-19 expenses (3)
|
(4.3) | — | — | ||||||||||||||
|
Sun Care reformulation costs (4)
|
— | (2.8) | (25.3) | ||||||||||||||
|
Feminine and Infant Care evaluation costs (5)
|
(0.3) | (2.1) | — | ||||||||||||||
|
Investor settlement expense (6)
|
— | (0.9) | — | ||||||||||||||
| Gain on sale of Playtex gloves assets | — | — | 15.3 | ||||||||||||||
|
Pension settlement expense (7)
|
— | — | (5.4) | ||||||||||||||
| Amortization of intangibles | (17.3) | (17.7) | (17.7) | ||||||||||||||
| Interest and other expense, net | (66.6) | (64.1) | (66.6) | ||||||||||||||
| Total earnings (loss) before income taxes | $ | 87.3 | $ | (390.3) | $ | 163.8 | |||||||||||
| Depreciation and amortization | |||||||||||||||||
| Wet Shave | $ | 44.8 | $ | 47.3 | $ | 49.0 | |||||||||||
| Sun and Skin Care | 13.8 | 12.9 | 13.6 | ||||||||||||||
| Feminine Care | 11.9 | 11.2 | 12.0 | ||||||||||||||
| All Other | 1.0 | 4.7 | 5.3 | ||||||||||||||
| Total segment depreciation and amortization | 71.5 | 76.1 | 79.9 | ||||||||||||||
| Corporate | 17.3 | 17.7 | 17.7 | ||||||||||||||
| Total depreciation and amortization | $ | 88.8 | $ | 93.8 | $ | 97.6 | |||||||||||
86
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total Assets | |||||||||||||||||
| Wet Shave | $ | 709.8 | $ | 725.3 | |||||||||||||
| Sun and Skin Care | 212.4 | 207.7 | |||||||||||||||
| Feminine Care | 146.3 | 163.7 | |||||||||||||||
| All Other | — | 35.1 | |||||||||||||||
| Total segment assets | 1,068.5 | 1,131.8 | |||||||||||||||
|
Corporate (8)
|
384.6 | 343.4 | |||||||||||||||
| Goodwill and other intangible assets, net | 2,087.8 | 1,945.7 | |||||||||||||||
| Total assets | $ | 3,540.9 | $ | 3,420.9 | |||||||||||||
| Capital Expenditures | |||||||||||||||||
| Wet Shave | $ | 34.8 | $ | 37.4 | $ | 36.3 | |||||||||||
| Sun and Skin Care | 7.1 | 9.9 | 11.7 | ||||||||||||||
| Feminine Care | 5.0 | 7.5 | 10.1 | ||||||||||||||
| All Other | 0.8 | 3.2 | 3.9 | ||||||||||||||
| Total segment capital expenditures | 47.7 | 58.0 | 62.0 | ||||||||||||||
| Corporate | — | — | — | ||||||||||||||
| Total capital expenditures | $ | 47.7 | $ | 58.0 | $ | 62.0 | |||||||||||
(1)Restructuring costs associated with Project Fuel includes SG&A of $13.3, $8.6, and $1.4 for fiscal 2020, 2019, and 2018, respectively, primarily consisting of certain information technology enablement expenses and incentive and retention compensation expenses. Additionally, restructuring costs associated with Project Fuel includes Cost of products sold of $0.2 and $0.6 for fiscal 2020 and 2019, respectively, related to inventory obsolescence write-offs.
(2)Includes SG&A of $39.2, $6.7, and $3.4 for fiscal 2020, 2019 and 2018, respectively, related to integration expenses associated with acquisitions and Cost of products sold of $0.6 and $1.8 related to the valuation of acquired inventory for fiscal 2020 and 2018, respectively.
(3)Includes pre-tax Cost of products sold of $4.3 for fiscal 2020 which included incremental costs incurred by the Company related to higher benefit and emergency payments, supplies and freight.
(4)Includes Cost of products sold of $2.8 and $25.3 for fiscal 2019 and 2018, respectively, associated with supply chain changes and inventory write-offs on select Sun Care products.
(5)Includes pre-tax SG&A of $0.3 and $2.1 for fiscal 2020 and 2019, respectively, associated with consulting costs incurred in connection with the evaluation of our Feminine Care and Infant Care segments.
(6)Includes pre-tax SG&A of $0.9 for fiscal 2019 associated with a settlement with an investor.
(7)Pension settlement expense was the result of increased lump sum benefit payments in fiscal 2018 from higher employee turnover associated with Project Fuel. The lump sum benefit payments are not expected to be recurring in nature.
(8)Corporate assets include all cash and cash equivalents, financial instruments and deferred tax assets that are managed outside of operating segments.
The following table presents the Company’s net sales and long-lived assets by geographic area:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net Sales to Customers | |||||||||||||||||
| United States | $ | 1,082.8 | $ | 1,189.2 | $ | 1,245.8 | |||||||||||
| International | 866.9 | 951.8 | 988.6 | ||||||||||||||
| Total net sales | $ | 1,949.7 | $ | 2,141.0 | $ | 2,234.4 | |||||||||||
| Long-lived Assets | |||||||||||||||||
| United States | $ | 257.0 | $ | 292.9 | |||||||||||||
| Germany | 51.6 | 42.0 | |||||||||||||||
| Other International | 62.3 | 61.1 | |||||||||||||||
| Total long-lived assets excluding goodwill and other intangibles, net, and other assets | $ | 370.9 | $ | 396.0 | |||||||||||||
The Company’s international net sales are derived from customers in numerous countries, with no sales to any individual foreign country exceeding 10% of the Company’s total Net sales. For information on customer concentration and product concentration risk, see Note 16 of Notes to Consolidated Financial Statements.
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Supplemental product information is presented below for net sales:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Razors and blades | $ | 1,023.3 | $ | 1,108.4 | $ | 1,185.4 | |||||||||||
| Sun care products | 283.3 | 328.7 | 342.0 | ||||||||||||||
| Tampons, pads and liners | 298.6 | 308.1 | 329.5 | ||||||||||||||
| Shaving gels and creams | 139.0 | 141.7 | 144.7 | ||||||||||||||
| Infant care and other | 26.8 | 119.7 | 121.5 | ||||||||||||||
| Skin care products | 178.7 | 134.4 | 111.3 | ||||||||||||||
| Total net sales | $ | 1,949.7 | $ | 2,141.0 | $ | 2,234.4 | |||||||||||
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Note 19 - Quarterly Financial Information (Unaudited)
| Fiscal 2020 (by quarter) | |||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | ||||||||||||||||||||
| Net sales | $ | 454.0 | $ | 523.0 | $ | 483.9 | $ | 488.8 | |||||||||||||||
|
Gross profit (1)(2)(3)
|
193.1 | 243.0 | 222.7 | 222.1 | |||||||||||||||||||
|
Net earnings (1)(2)(3)(4)(5)(6)
|
22.4 | 19.5 | 4.7 | 21.0 | |||||||||||||||||||
|
Basic earnings per share (7)
|
0.41 | 0.36 | 0.09 | 0.39 | |||||||||||||||||||
|
Diluted earnings per share (7)
|
0.41 | 0.36 | 0.09 | 0.38 | |||||||||||||||||||
| Fiscal 2019 (by quarter) | |||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | ||||||||||||||||||||
| Net sales | $ | 457.1 | $ | 546.7 | $ | 609.2 | $ | 528.0 | |||||||||||||||
|
Gross profit (1)(2)(9)
|
193.5 | 250.9 | 292.2 | 230.0 | |||||||||||||||||||
|
Net (loss) earnings (1)(2)(6)(8)(9)(10)
|
(0.4) | 48.2 | (460.7) | 40.7 | |||||||||||||||||||
|
Basic (loss) earnings per share (7)
|
(0.01) | 0.89 | (8.51) | 0.75 | |||||||||||||||||||
|
Diluted (loss) earnings per share (7)
|
(0.01) | 0.89 | (8.51) | 0.75 | |||||||||||||||||||
(1)Restructuring and related costs were $8.0, $12.4, $10.4 and $7.3 for the first, second, third and fourth quarters of fiscal 2020, respectively, and $18.5, $15.4, $8.9 and $12.8 for the first, second, third and fourth quarters of fiscal 2019, respectively. See Note 4 of Notes to Consolidated Financial Statements.
(2)Includes acquisition and integration costs impacting SG&A of $6.2, $25.5, $0.3 and $7.2 for the first, second, third and fourth quarters of fiscal 2020, respectively, and $0.5, $0.5, $1.9 and $3.8 for the first, second, third and fourth quarters of fiscal 2019, respectively. Additionally, the impact of acquisition and integration costs to Cost of products sold totaled $0.6 in the fourth quarter of fiscal 2020. See Note 3 of Notes to Consolidated Financial Statements.
(3)Includes pre-tax Cost of products sold of $3.9 and $0.4 for the third and fourth quarters of fiscal 2020, which included incremental costs incurred by the Company related to higher benefit and emergency payments, supplies and freight, net of government credits received.
(4)Cost of early debt retirement was $26.2 in the third quarter of fiscal 2020, related to retirement of the 2021 Notes that were repaid in May 2020.
(5)The sale of the Infant and Pet Care business resulted in a gain of $4.1 in the first quarter of fiscal 2020.
(6)Feminine and Infant Care evaluation costs were $0.3 for the first quarter of fiscal 2020, and $1.0, $0.5, and $0.6 in the second, third and fourth quarters of fiscal 2019, respectively.
(7)Quarterly and annual computations are prepared independently. Therefore, the sum of each quarter may not necessarily total the fiscal period amounts noted elsewhere within this Annual Report on Form 10-K.
(8)The third quarter of fiscal 2019 includes non-cash impairment charges of $570.0 related to intangible assets. See Note 7 of Notes to Consolidated Financial Statements.
(9)Sun Care reformulation included charges to Cost of products sold of $0.1, $0.4, $1.0, and $1.3 in the first, second, third and fourth quarters of fiscal 2019, respectively.
(10)Includes pre-tax SG&A of $0.9 in the first quarter of fiscal 2019, associated with a settlement with an investor.
Note 20 - Subsequent Events
On November 20, 2020, the Board of Directors declared a cash dividend of $0.15 per share of Common Stock, payable on January 6, 2021, to all shareholders of record as of the close of business on December 10, 2020.
89
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020. Based on that evaluation, our CEO and CFO concluded that, as of that date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles for external purposes. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting, because of its inherent limitations, may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework set forth in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s assessment, management has concluded that internal control over financial reporting as of September 30, 2020 was effective.
The Company's management has excluded the acquisition of Cremo Holding Company, LLC (“Cremo”) from its assessment of internal control over financial reporting as of September 30, 2020, because Cremo was acquired by the Company on September 2, 2020. The assets excluded from our assessment for the Cremo acquisition represent 0.6% of consolidated assets as of September 30, 2020 and 0.2% of consolidated net sales for the fiscal year ended September 30, 2020.
The Company’s internal control over financial reporting as of September 30, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding our directors will be included in our definitive proxy statement for our annual meeting of shareholders, which will be filed with the United States Securities and Exchange Commission (“SEC”) within 120 days after September 30, 2020.
Information regarding our executive officers is included in Item 1. Business of this Annual Report on Form 10-K.
We have adopted business practices and standards of conduct that are applicable to all employees, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. We have also adopted a code of business conduct applicable to our Board of Directors. The codes have been posted on the Investor section of our website at www.edgewell.com. In the event that an amendment to, or a waiver from, a provision of one of the codes of ethics occurs and it is determined that such amendment or waiver is subject to the disclosure provisions of Item 5.05 of Current Report on Form 8-K, we intend to satisfy such disclosure by posting such information on our website for at least a 12-month period.
Item 11. Executive Compensation.
Information regarding the compensation of our named executive officers and directors will be included in our definitive proxy statement for our annual meeting of shareholders, which will be filed with the SEC within 120 days after September 30, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding individuals or groups that own more than five percent of our common shares, as well as information regarding the security ownership of our executive officers and directors, information relating to securities authorized for issuance under equity compensation plans and other shareholder matters will be included in our definitive proxy statement for our annual meeting of shareholders, which will be filed with the SEC within 120 days after September 30, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding transactions with related parties and director independence will be included in our definitive proxy statement for our annual meeting of shareholders, which will be filed with the SEC within 120 days after September 30, 2020.
Item 14. Principal Accounting Fees and Services.
Information regarding the services provided by and fees paid to PricewaterhouseCoopers LLP, our independent auditors, will be included in our definitive proxy statement for our annual meeting of shareholders, which will be filed with the SEC within 120 days after September 30, 2020.
91
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this report:
1)Financial Statements. The following are included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
◦Report of Independent Registered Public Accounting Firm.
◦Consolidated Statements of Earnings and Comprehensive Income (Loss) for the fiscal years ended September 30, 2020, 2019 and 2018.
◦Consolidated Balance Sheets as of September 30, 2020 and 2019.
◦Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2020, 2019 and 2018.
◦Consolidated Statements of Changes in Shareholders’ Equity for the period from October 1, 2017 to September 30, 2020.
◦Notes to Consolidated Financial Statements.
2)Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
| Fiscal Year | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Allowance for Doubtful Accounts | ||||||||||||||||||||
| Balance at beginning of year | $ | 5.6 | $ | 6.0 | $ | 4.3 | ||||||||||||||
| Provision charged to expense, net of reversals | 3.7 | 0.2 | 2.3 | |||||||||||||||||
| Write-offs, less recoveries, translation, other | (1.4) | (0.6) | (0.6) | |||||||||||||||||
| Allowance for acquired receivables | 0.3 | — | — | |||||||||||||||||
| Balance at end of year | $ | 8.2 | $ | 5.6 | $ | 6.0 | ||||||||||||||
| Income Tax Valuation Allowance | ||||||||||||||||||||
| Balance at beginning of year | $ | 7.2 | $ | 7.0 | $ | 8.4 | ||||||||||||||
| Provision charged to expense | 1.4 | (0.1) | 0.7 | |||||||||||||||||
| Write-offs, less recoveries, translation, other | (0.1) | 0.3 | (2.1) | |||||||||||||||||
| Balance at end of year | $ | 8.5 | $ | 7.2 | $ | 7.0 | ||||||||||||||
3)Exhibits. The exhibits are included in the Exhibit Index that appears at the end of this Annual Report on Form 10-K.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EDGEWELL PERSONAL CARE COMPANY | |||||||||||
| By: | /s/ Rod R. Little | ||||||||||
| Rod R. Little | |||||||||||
| President and Chief Executive Officer | |||||||||||
Date: November 20, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated.
| Signature | Title | ||||
| /s/ Rod R. Little | |||||
|
Rod R. Little (principal executive officer)
|
President and Chief Executive Officer | ||||
| /s/ Daniel J. Sullivan | |||||
|
Daniel J. Sullivan (principal financial officer)
|
Chief Financial Officer | ||||
| /s/ Robert Black | |||||
| Robert Black | Director | ||||
| /s/ George Corbin | |||||
| George Corbin | Director | ||||
| /s/ Daniel J. Heinrich | |||||
| Daniel J. Heinrich | Director | ||||
| /s/ Carla C. Hendra | |||||
| Carla C. Hendra | Director | ||||
| /s/ R. David Hoover | |||||
| R. David Hoover | Director | ||||
| /s/ John C. Hunter | |||||
| John C. Hunter | Director | ||||
| /s/ James C. Johnson | |||||
| James C. Johnson | Director | ||||
| /s/ Joseph D. O’Leary | |||||
| Joseph D. O’Leary | Director | ||||
| /s/ Rakesh Sachdev | |||||
| Rakesh Sachdev | Director | ||||
| /s/ Swan Sit | |||||
| Swan Sit | Director | ||||
| /s/ Gary Waring | |||||
| Gary Waring | Director | ||||
| Date: November 20, 2020 | |||||
93
EXHIBIT INDEX
| Exhibit Number | Exhibit | ||||
| 2.1*** | |||||
| 2.2*** | |||||
| 2.3*** | |||||
| 2.4*** | |||||
| 2.5*** | |||||
| 2.6 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 3.3* | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | |||||
94
| 10.6 | |||||
| 10.7 |
|
||||
| 10.8 | |||||
| 10.9 | |||||
| 10.10 | |||||
| 10.11 | |||||
| 10.12 | |||||
| 10.13 | |||||
| 10.14** | |||||
| 10.15** | |||||
| 10.16** | |||||
| 10.17** | |||||
| 10.18** | |||||
| 10.19** | |||||
| 10.20** | |||||
| 10.21** | |||||
| 10.22** | |||||
| 10.23** | |||||
| 10.24** | |||||
| 10.25** | |||||
| 10.26** | |||||
| 10.27** | |||||
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| 10.28** | |||||
| 10.29** | |||||
| 10.30** | |||||
| 10.31** | |||||
| 10.32** | |||||
| 10.33** | |||||
| 10.34** | |||||
| 10.35** | |||||
| 10.36** | |||||
| 10.37** | |||||
| 10.38** | |||||
| 10.39** | |||||
| 10.40** | |||||
| 10.41** | |||||
| 10.42** | |||||
| 10.43** | |||||
| 10.44** | |||||
| 21.1* | |||||
| 23.1* | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1* | |||||
| 32.2* | |||||
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| 101* | The following materials from the Edgewell Personal Care Company Annual Report on Form 10-K formatted in inline eXtensible Business Reporting Language (iXBRL): (i) the Consolidated Statements of Earnings and Comprehensive Income for the years ended September 30, 2018, 2019 and 2020, (ii) the Consolidated Balance Sheets at September 30, 2019 and 2020, (iii) the Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2019 and 2020, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the period from October 1, 2017 to September 30, 2020, and (v) Notes to Consolidated Financial Statements for the year ended September 30, 2020. | ||||
*Filed herewith.
**Denotes a management contract or compensatory plan or arrangement.
***The Company hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit to such agreement to the Securities and Exchange Commission upon request.
97